Brookfield Renewable Partners L.P. (NYSE:BEP) Q3 2023 Earnings Call Transcript

Brookfield Renewable Partners L.P. (NYSE:BEP) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good day and thank you for standing by. Welcome to the Brookfield Renewable Partners Third Quarter 2023 Results Conference Call and Webcast. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Connor Teskey, Chief Executive Officer. Please go ahead.

Connor Teskey: Thank you, operator. Good morning, everyone, and thank you for joining us for our third quarter 2023 conference call. Before we begin, we would like to remind you that a copy of our news release, investor supplement and letter to unit holders can be found on our website. We 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 future results may differ materially. For more information, you are encouraged to review our regulatory filings available on SEDAR, EDGAR, and on our website. On today’s call, we will provide an update on the business and how we are positioned in the current market environment. Jenny Li, our Vice President in our investment teams in Toronto, will provide an update on our growth activities.

And then lastly, Wyatt will conclude the call by discussing our operating results and financial position. Following our remarks we look forward to taking your questions. We had another successful quarter utilizing our disciplined approach to growth and execution to outperform our targets and deliver strong operating results. Furthermore, as Jenny will highlight, we recently closed our acquisition of X-Elio and Deriva Energy, formerly Duke Energy Renewables, as well as advanced our acquisitions of Westinghouse Electric, which we expect to close shortly, and Origin Energy. With the closing of these acquisitions, we are adding significant incremental FFO and are positioning ourselves to continue to deliver on our decade-long track record of 10% plus FFO per unit annual growth.

That said, we want to also touch briefly on the market environment and our share price. The renewable sector traded down in the public markets on the back of higher interest rates and a perceived tightening of industry margins. And even though we are well positioned to benefit in this environment and insulated from the challenges that are seemingly impacting others in the sector, we have not been immune to the lower trading environment. It is important to note that while we are never pleased when our share price is down, we are long-term focused investors and between our strong position in the market, major global themes, and the overarching sector tailwinds, the outlook for our business has never been better. As we continue to deliver on our growth targets and execute on our strategic priorities, our share price should respond and better reflect the intrinsic value of the business.

Most importantly, we are not seeing any reduction in the returns we are able to generate. In fact, quite the opposite. We are seeing an abundance of opportunities to invest at or above our target returns. The combination of accelerating demand for clean power from corporations and fewer players with access to capital is creating a favorable environment for those such as ourselves with capital, capabilities, and a pipeline of projects to deliver for our customers. Notably, we are seeing particularly attractive opportunities to acquire businesses with strong development pipelines, but lack the access to capital or scale operating capabilities to build out these projects. This is creating a powerful and virtuous cycle. We are capturing increasing demand through our existing capabilities and pipeline, while at the same time using our access to capital to add leading platforms in core markets around the world, further enhancing our capabilities and positioning us to capture even further demand in the future as we position ourselves as the clean energy and decarbonization partner of choice for leading corporations.

Over the past five years, the amount of clean energy procured annually by corporations has increased by almost 10 times. And looking forward, we do not expect this trend to slow down. Access to energy is now a key constraint for a number of these buyers, including leading technology companies to execute on their growth plans in some of their highest margin segments. This strong and growing demand from these customers, combined with our ability to provide 24/7 clean power solutions from our technologically diversified fleet and our credibility to deliver scale projects globally and on time, is translating into signing contracts at prices that appropriately compensate us for higher construction and financing costs. As an example, by leveraging our development pipeline, our existing hydro facilities, and our power marketing capabilities, we recently signed an agreement with one of the leading global technology companies to provide them with a total of 18 terawatt hours over the next five years to serve their growing requirements in the U.S. We continue to establish ourselves as a key enabler for the large tech companies, providing them the critical power to support their data centers and growing cloud and artificial intelligence activities.

We also want to touch on our approach to development. We continue to be focused on opportunities that we can de-risk quickly and deliver appropriately risk adjusted returns. So while we are doing more development, we are not compromising on the principles that have served us well to this point and are taking our extensive knowledge built over the past decades to enhance our capabilities globally. We do not build on spec and reduce risks in our investments by not taking basis risk, meaning we simultaneously secure power purchase agreements, customer contracts, and financing before ever committing significant capital. We limit construction risk by using a localized approach to construction and development, and manage our CapEx spend by leveraging our central procurement capabilities.

We also look to leverage our commercial teams to source the highest quality off-takes and focus on the most mature and lowest cost renewable power technologies in the highest growth regions to always ensure that our projects will produce the most de-risked high quality cash flows. As an example, while there have been recent announcements impacting the outlook for offshore wind in the U.S., largely on the back of its competitive position, cost increases, and reliance on subsidies, the development of onshore wind continues to be robust given the attributes of these projects. There are over 100 gigawatts of onshore capacity expected to come online in the United States by the end of the decade, including almost 9 gigawatts of onshore wind from our development pipeline.

We are using this playbook to develop our large global pipeline, which now stands at nearly 150 gigawatts. We expect to deliver 5 gigawatts of new capacity this year and another approximately 15 gigawatts over the next two years, contributing approximately $270 million of additional FFO annually. Much of the capital for these projects has already been invested, and like the rest of our business, these projects are expected to deliver attractive economics given our de-risk approach to execution. With that, we will turn the call over to Jenny to speak about our growth activities.

Jenny Li: Thank you, Connor, and good morning, everyone. This past quarter, we agreed to invest approximately $2.2 billion of equity capital, highlighted by our agreement to acquire Banks Renewables, a leading independent U.K.-based renewable energy development business with approximately 260 megawatts of onshore wind assets. The business also has approximately 800 megawatts of near-term development projects and a further 3,000 megawatt pipeline of earlier stage projects. Banks is a full-service end-to-end platform with strong capabilities across the entire project life cycle, including origination, development, commercial contracting, financing, and operations. The team has been successful developing high-quality projects in the U.K., but have generally been limited by access to capital.

Under our ownership, we believe we can accelerate organic growth in capital recycling and expand the business via M&A in the fragmented U.K. market. The transaction is expected to close before year end. We also agreed to partner with Axis Energy, a leading renewable developer in India, to create a new large-scale development platform through which we expect to develop approximately 250 megawatts — 2,500 megawatts of wind and solar capacity over the next three years. Axis is a well-known partner to us through our previous joint venture partnership in which we have already successfully developed almost 2,000 megawatts of capacity over the past two years. This quarter, we made good progress closing our previously announced highly accretive M&A transactions.

First, we close the acquisition of the remaining 50% interest in X-Elioc, our leading global solar developer, bringing our total ownership interest to 100%. We also close the acquisition of Deriva Energy, formerly Duke Energy Renewables, one of the largest renewable platforms in the U.S. With almost 6,000 megawatts of operating and other construction assets diversified across wind, utility scale solar, and storage with a sizable development pipeline of approximately 6,000 megawatts. With this acquisition we are adding a scale operating renewable platform generating strong contracted cash flows with a 13-year weighted average remaining contract life. The acquisition is immediately accretive, generating FFO yields in the mid-teen with opportunities to add value by leveraging commercial and operational synergies and executing on the significant optionality to repower the operating wind portfolio over time.

Using our recent experience repowering Bishop Hill flat wind farm. On our acquisition of Westinghouse Electric, we recently received all required regulatory approvals and expect to close the transaction early next week. With this acquisition, we are adding a leading provider of mission-critical technology, services, and products to the nuclear industry from a business that generates infrastructure like cash flows, servicing approximately half the global nuclear fleet. Approximately 85% of Westinghouse’s revenues come from long-term contracted or highly recurring customer service provisions with nearly 100% customer retention rate. Nuclear power is a reliable zero carbon technology that supports the growth of renewables by providing critical base load power to our grids and is essential to a net zero economy in our view.

Since our announced acquisition, we have seen a resurgence in the growth of outlook for nuclear. With several new builds being announced, a number of which were new contracts awarded to Westinghouse, providing opportunities for growth for Westinghouse’s engineering and design business, as well as its core fuel and services business, none of which was underwritten in our acquisition. Westinghouse is also capturing growth in its core business, winning contracts to service almost all of the operating nuclear plants in Eastern Europe, which have historically been served by Russian providers. With the close of this acquisition, we are adding a business which yields double-digit FFO based on highly visible and reliable cash flows. The business also provides significant upside to underwriting returns, some of which have already materialized.

Over time, we expect to leverage our commercial contracting capabilities to allow Westinghouse to further grow as our large customers are seeking sources of clean dispatchable and space load power. This quarter we also move forward with our acquisition of Origin Energy, receiving authorizations from the Australian Competition and Consumer Commission in October, and received a unanimous recommendation from Origin’s Board having increased our offer to the top end of their independent experts valuation range, providing a compelling opportunity for Origin’s shareholders to realize the value of their investment. With the shareholder vote scheduled for late November, we expect to close the acquisition in early 2024, adding a large-scale strategic platform in Australia.

Origin is Australia’s largest integrated power generation and energy retailer with an industry-leading cost model, driving strong margins and cash flow visibility to fund the large-scale renewables buildout. With this acquisition, we have the opportunity to accelerate the development of renewable generation capacity, to serve the existing retail energy customer base, and to help decarbonize the Australian grid at this crucial time in its energy transition. In total, over the coming months, we expect to have closed transactions totaling over $9 billion or around $1.5 billion net to Brookfield Renewable, deploying equity capital into immediately accretive transactions, adding approximately $200 million in incremental annual FFO. I will now turn it over to Wyatt to discuss our operating results and financial position.

Wyatt Hartley: Thank you, Jenny. As Connor spoke to in his earlier remarks, we continue to build on our strong first-half of the year. Operating results reflect our highly diversified platform, inflation index cash flows, and strong all-in pricing. We generated FFO of $253 million or $1.29 per unit year-to-date equating to a 7% increase, compared to last year and continue to be positioned to deliver our 10% plus FFO per unit growth target for the year. Our business is backed by high quality cash flows, in large part from our perpetual hydro portfolio, which is becoming increasingly valuable in today’s environment, where customers are looking for 24/7 clean power solutions. The dispatchable base load power that our hydro’s generate provide a unique advantage for us in partnering with buyers of clean power.

We are also set to benefit from re-contracting these assets over the next several years, which will not only contribute additional FFO in the strong current pricing environment, but also act as a highly accretive funding source for growth as we up finance many of the assets due to their low levels of debt. Our financial position remains strong. We expect to execute just short of $20 billion of non-recourse financing this year, generating over $800 million in up-financing proceeds, while maintaining our strong investment grade credit rating. We ended the quarter with $4.4 billion of available liquidity, providing significant flexibility to continue executing on our growth and development strategy. We have also been crystallizing and proving out our returns through asset recycling.

In the past 18 months, we have generated $1.4 billion in proceeds from our asset recycling program, which on average represents almost 3 times our invested capital. Despite it being a scarcer environment for capital, we continue to see strong demand for appropriately sized de-risk assets with long-term contracts and fixed-rate financing in place. As an example, we recently agreed to the sale of a 150 megawatt solar facility in Europe that we commissioned earlier this year for proceeds of $100 million, representing almost 3 times our invested capital. In light of public market conditions and our strong conviction in the intrinsic value of our business and growth trajectory, we have also started to allocate capital to repurchase shares. Starting this quarter, we repurchased almost 1.5 million units under our normal course issuer bid.

Looking forward, we will continue to allocate capital based on where we are seeing the best risk-adjusted returns and remain confident that we will continue to create meaningful value for our investors. In closing, we remain focused on delivering 12% to 15% long-term total returns for our investors, while remaining disciplined allocators of capital, leveraging our deep funding sources and operational capabilities to enhance and de-risk our business. On behalf of the board and management, we thank all our unit holders and shareholders for the ongoing support. We are excited about Brookfield Renewables’ future and look forward to updating you on our progress throughout the remainder of the year. That concludes our formal remarks for today’s call.

Thank you for joining us this morning. And with that, I’ll pass it back to our operator for questions.

Operator: Thank you. [Operator Instructions] And our first question will come from Sean Steuart from TD Securities. Your line is open.

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Q&A Session

Sean Steuart: Thank you. Good morning everyone. A couple of questions. Connor, you touched on I guess a broadening growth opportunity set given valuation contraction across the sector. We’ve seen an accelerating meltdown in public valuations especially for offshore wind. You guys have taken a measured approach to that asset class? Do you have any updated thoughts on prospective growth initiatives in offshore wind as you potentially take advantage of valuation disconnect there?

Connor Teskey: Good morning, Sean. Thanks for the question. I think it’s important that we be clear here. We quite like offshore. We think it’s a mature technology. It’s a large-scale technology. It provides a differentiated load pattern that is very important to energy grids in certain markets around the world. And therefore, we would willingly invest in offshore if we saw the right risk-adjusted returns. Our lack of exposure to offshore traditionally is not a result of the technology, but rather the investment profile that offshore opportunities has traditionally provided, where you had to invest significant amounts of capital, hundreds of millions if not billions of dollars up front, for the right to buy or sorry, the right to build out a project in three or four or five or six years when you didn’t know the environment you would be building it.

You didn’t know CapEx costs or financing costs or things like that. And that is precisely the basis risk that we try to be very, very disciplined about and remove in the investment opportunities we pursue and the execution of our development pipeline. So it was nothing to do with offshore technology itself. We simply didn’t like the investment profile, because it didn’t fit with our approach of trying to remove basis risk. As we look at the opportunity today, we do think there are a number of opportunities where that basis risk is increasingly shrinking. You know, if a project needed to win approval three or four years ago and it is going to get built out, you know, next year or the year after, that basis risk has shrunk materially. And now with some of the headwinds in the sector, there might be some eager sellers as well.

So I would say we feel comfortable with our disciplined approach to entering the sector. And we do think it looks a lot more attractive to us today than it has in the past.

Sean Steuart: Okay, thanks for that detail. And just following on that, as you think about M&A prospects, even since the investor day in September, valuations have changed quite a bit. Can you speak to discrepancies between public and private opportunities across the M&A opportunities you’re looking at right now?

Connor Teskey: Certainly. Probably put it in two buckets. One is there’s a continuing trend that I would say has been attractive for a couple years and remains attractive today. And that is there are a number of high quality, I will say, private medium-sized developers in core markets that have fantastic pipelines and asset bases, but simply don’t have the scale, the access to capital, or the operating capabilities to build out those projects and really to capture the value in those pipelines that they have assembled. And we’ve been executing a number of those acquisitions and I think that will continue in private markets going forward. And then in public markets, you know, make no mistake about it. We’re constantly tracking the public markets and for a couple of years there, it was very difficult to execute in the public markets at our target returns.

But given the adjustments in market valuations, there are a number of names that I would say are increasingly entering the strike zone in terms of attractive value and therefore we do think we could be more active on the public side going forward than we have been over the last couple of years.