Brookfield Renewable Partners Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 5, 2023

There are 8 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Brookfield Renewables First Quarter 2023 Results Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Conor Teske, Chief Executive Officer.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us for our Q1 2023 conference call. Before we begin, we would like to remind you that a copy of our news release, investor supplement and letter to unitholders 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 our future results may differ materially.

Speaker 1

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 our business and our recent development activities. Ignacio Pazares, a Managing Director and Head of our European Investment team, will highlight some of our recent transactions. And then lastly, Wyatt will conclude the call by discussing our operating results and financial position. Following our prepared remarks, we look forward to taking your questions.

Speaker 1

We had an excellent start to the year With strong financial results, good progress advancing our development pipeline and success with respect to our growth initiatives, We generated funds from operations of $275,000,000 or $0.43 per unit, a 13% increase from the same period last year, representing the progression to higher run rate earnings as our investments in new generation and various commercial initiatives come online. We also followed up on what was a very robust year for growth with a strong Q1, Signing transactions for almost $8,000,000,000 of equity investment alongside our institutional partners or over $1,000,000,000 net to Brookfield Renewable. Together with prior transactions, these investments position us to achieve and likely outperform our $6,000,000,000 to $7,000,000,000 capital deployment target over the next 5 years. This includes our landmark transaction integrated power generator and energy retailer. With this transaction, we will add a strategic platform in the country to leverage our deep development expertise to invest a further AUD20 billion, enabling us to build out 14,000 megawatts of new renewable generation and storage facilities.

Speaker 1

This investment in clean replacement generation capacity will enable the responsible retirement of 1 of Australia's largest coal fired power plants and make a material difference to achieving the country's net zero goals. The acquisition and planned decarbonization of the business is an example of the type of investment that is necessary to meet global net zero targets. We are excited about this transaction and the potential at Barings to grow our business in a highly attractive market and generate strong risk adjusted returns for our investors. Our success in deploying large scale capital is a testament to our track record. As demonstrated by our ability to attract Discretionary co investment from some of the largest and most sophisticated investors around the world.

Speaker 1

This has been critical in allowing us to further diversify our business and take on large scale investments where we see less competition. As we have discussed in the past, our access to partnership capital is a key differentiator and while beneficial in all instances, It is particularly advantageous in the current market environment. With Brookfield's 1st global transition fund nearly fully committed, We are preparing to participate in the 2nd fund. Based on the positive feedback received to date, we are optimistic that the 2nd fund will both broaden the number of institutional partnerships as well as provide a larger pool of capital to invest alongside, positioning us to continue to execute scale transactions at very attractive risk adjusted returns. Touching briefly on the broader market and recent events.

Speaker 1

Over the last few months, we all witnessed significant market and interest rate volatility on the back of persistent inflationary pressures and stress across the banking system. However, Our business continues to be very resilient. Our generation portfolio is currently 90% contracted and has a weighted average remaining contract duration of 14 years and approximately 70% of our revenues are linked to inflation. We also operate essential low cost infrastructure with gross margins of over 70% that are well protected throughout the business cycle. Going forward, our business plan and targets remain unchanged and we do not anticipate any meaningful operational or financial impact from recent events.

Speaker 1

Our financial position also remains strong with almost $4,000,000,000 of available liquidity. We have always prioritized financing our business on an investment grade basis with a focus on long duration match currency and fixed rate debt. As a result, we do not have any meaningful exposure to interest rate variability or any material debt maturities over the next 3 years. On our development initiatives, we commissioned approximately 700 megawatts of capacity in the quarter, Completing projects in 7 different countries around the world. We are on track to commission approximately 5,000 megawatts of capacity in 2023, which we expect to contribute an additional $70,000,000 of FFO net to Brookfield Renewable.

Speaker 1

We also progressed the other approximately 19,000 megawatts of projects in our advanced stage pipeline, maintaining our targeted commissioning dates. With that, we will turn it over to Ignacio to highlight some of our recent announced investments, including Exelio, where we increased ownership in a business we know well. Ignacio, over to you.

Speaker 2

Thank you, Conor, and good morning, everyone. As Connor just mentioned, I will go through our most recent deal activity, which is mainly taking place in India and around Xelio apart from Origin, which was just corporate. But before we get into the details, it would be good to provide some background. And as most of you may know, the investment environment for renewables and decarbonization assets remains highly compelling. It seems like demand for clean energy from corporates, increasing focus on energy security, Government supported electrification and decarbonization targets continue to be key trends supporting new investment.

Speaker 2

And with this backdrop, we have made significant progress growing our business globally over the last few months. Starting with India, we have executed 2 large scale transactions, tripling the size of our business in the country. First, we entered an agreement with Avada, a leading renewable platform with over 11,000 megawatts of operating and development assets to provide a structured U. S. Dollar financing solution that gives us significant debt like downside protection as well as equity like upside.

Speaker 2

In addition to Avada, we also agreed to acquire a 55% stake in CleanMax, another Leading Renewable platform also based in India with 4.5 gigawatts of operating and development pipeline and a plan to build over 2 gigawatts over the next 5 years. With these two acquisitions, our operating and development platform in the country will stand at approximately 21,000 megawatts. To provide some context around our growth strategy in India, Similar to Brookfield's broader approach to new geographies, we have now been on the ground in the country for more than 5 years on the renewable side and have gone through a strong learning curve by prudently making smaller scale investments. This has provided us with strong insights into the market dynamics, Reaching a point in which we are now ready to scale our business in the country in a transformational way by tripling its size through these two transactions. Moving away from India, we also entered into an agreement to acquire the 50% stake in Xelio that we did not already own.

Speaker 2

To refresh everyone, we made our original investment back in 2019, acquiring 50% of the business. And this past month, We agreed to acquire the remaining 50% of the company with a plan to syndicate about onethree of the overall ownership to co investors. This was a situation where we could put capital to work in a business we know better than anyone else given our existing position and doubled down On what we saw already been a very successful investment that continues to have a strong outlook. What attracted us originally to Xelio was that it was a fully integrated solar development platform with a global presence in key solar markets where we saw significant growth potential. The business also has one of the strongest management teams out there and excellent capabilities around Therefore, our Xili investment is a great example of an opportunity where we were able to take a very strong standalone platform for all the reasons I just mentioned and add significant value through our ownership.

Speaker 2

This value creation has taken place since acquiring Xelio by successfully implementing our initial business plan, which was mainly focused on delivering on growth, returning equity through asset recycling and adjusting the capital structure to create a self funding business model. But I would like to particularly focus on the asset rotation strategy of Xelio, where in the last 3 years, We've generated over $1,000,000,000 of equity proceeds from asset sales. This is more than doubling the invested capital in those projects that we sold. The proceeds from these sales have been used to return almost half of our initial investment and also reinvested into new construction and future Development. Growing the development pipeline from 5,000 megawatts at entry back in 2019 to over 12,000 megawatts today.

Speaker 2

We believe this has also been important to prove the value that Xelio is able to create through development or in other words, That the business can not only grow at a fast pace, but do it at strong returns and capital. Finally, Going forward, we expect Xcelia to continue benefiting from robust industry tailwinds and its leadership position in most of the markets where the business is present to further enhance its profitable growth base while maintaining its self funded business model. With that, I'll turn it over to Wyatt to

Speaker 3

Thank you, Ignacio. As Conor mentioned in his earlier remarks, we had a strong start to the year. Operating results reflect robust hydro generation Our portfolio, strong year on year realized power pricing, high asset availability and contributions from growth. We generated FFO of $275,000,000 or $0.43 per unit, an increase of 13% compared to the same period last year. Our business continues to exhibit strong cash flow resiliency Given the diversified asset base and the ability to capture higher power prices, both through inflation linked power purchase agreements and a robust energy price environment for our hydro assets.

Speaker 3

Across our hydro fleet, reservoirs are generally at or above long term averages, positioning the portfolio well for the remainder of the year. Our balance sheet is in excellent position and our available liquidity remains robust at almost $4,000,000,000 providing significant flexibility to fund growth and be opportunistic in the current environment. We also remain protected from higher interest rates with 90% of our borrowings being project level non recourse debt with an average remaining term of 12 years and only 3% exposure to floating rate debt. And while overall market liquidity may be challenged, lender appetite for high grade issuers, especially for those supporting renewables or decarbonization initiatives, remain strong as demonstrated by our recently completed issuance of CAD400 1,000,000 of 10 year corporate bonds, which were 3 times oversubscribed. We are also advancing non recourse financing initiatives and our asset recycling programs, which will generate additional capital to fund our growth.

Speaker 3

We continue to see strong demand for renewable energy assets globally and we are seeing strong interest across our capital recycling processes. In this regard, So far this year, we have generated over $300,000,000 or almost $200,000,000 net to Brookfield Renewable of proceeds from our asset recycling program, returning more than double our invested capital. We are also advancing numerous capital recycling opportunities, which including deals signed year to date could generate up to $4,000,000,000 or approximately $1,500,000,000 net to Brookfield Renewable. In closing, we remain focused on delivering 12% to 15% long term total returns for our investors. To do this, we will continue to be disciplined allocators of capital by leveraging our deep funding sources and operational capabilities to enhance value and de risk our business.

Speaker 3

On behalf of the Board and management, We thank all of our unitholders and shareholders for the ongoing support. We are excited about Brookfield Renewables' future and look forward to updating you on our progress throughout 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

Our first question comes from the line of Sean Steuart with TD Securities.

Speaker 4

Thank you. Good morning, everyone. A couple of questions. Let's start with India, Conor or Ignacio. You've talked a lot about that country is a growth target for a long time and we're encouraged to see you deploying capital more quickly now.

Speaker 4

Can you speak to how dynamics in that market have evolved to the point that you're more comfortable putting Capital to work there. And can you give us an idea of where the returns in India compare to other markets you're targeting for growth?

Speaker 1

Perfect. Thanks, Sean. You're absolutely right. And Ignacio touched upon this a little bit. We entered the Indian market in 2017.

Speaker 1

And since entering the market 5 years ago, We've really enhanced and broadened our capabilities on the ground there. And we've done a number of what we would call fairly modest bolt on transactions. But to be clear, over the last 5 years, I would say we've reviewed almost every major transaction that's taken place in that market. And we've always just been very selective about finding opportunities that have the right value entry point. And for a number of reasons, we're seeing an influx of those right now.

Speaker 1

And I do think that our expanded capabilities in the region and our ability to be a partner at scale to some of the growing Forms is really what is differentiating us at this point because in terms of what is really defining that market, It's two things. 1, there are incredible renewable build out ambitions. And then secondly, Where in other markets around the world, we see our business driven primarily by corporates. Historically, a lot of renewables in India have been sold through government auctions. And increasingly now in India, we're seeing more of a commercial and Fuel contracting market developed and that really plays to our strengths.

Speaker 1

And for example, that is where CleanMax is one of the leaders in the Indian market and why we're so excited to be partnered with that platform. In terms of returns, We do look for a return premium given it is a growing and developing market. And we do take into account The cost of hedging the currency back to U. S. Dollars and therefore when we look in local currency returns, we're certainly targeting Things probably closer to the high teens.

Speaker 1

And when that comes back to U. S. Dollars, we're still kind of mid to high teens.

Speaker 4

Okay. Thanks for that detail. My second question is on the asset recycling program. It sounds like A lot of the initiatives are expected to close in the near term. We have a sense of some of them like Sheppard Flat, but Can you give us a sense of what the regional or technology focus is for asset recycling?

Speaker 4

And You've touched on some really compelling returns for assets you sold of late, but any target returns on those asset sales that are Coming in the next few quarters that you can give us some context on.

Speaker 1

Certainly. So we'll answer that in 2 parts. I would say, Broadly, we have a fairly robust pipeline of asset recycling initiatives. At this point, it's Comprised largely of wind and solar assets. And I would say this is probably coincidence more than anything else, but the Regions where we're most active on the asset recycling side are the Americas, North and South America.

Speaker 1

In terms of the returns, we're still seeing very, very robust Demand, particularly for high quality de risked wind and solar assets. And This might be a funny analogy to make, but when interest rates went down And you look back maybe 12 or 15 months ago and interest rates were very, very low. I'm going to be illustrative here. Let's assume you were selling at 7% return. Interest rates have gone up materially, maybe 150 basis points or 200 basis points.

Speaker 1

We're not seeing the absolute return on the assets that we are selling widened by the same amount. Maybe it's 50 basis points wider, but that's not going to have a material impact on our business. And the returns that we can generate Developing assets at a higher return and then selling down to a lower cost of capital buyer. We actually draw a very similar parallel to the real estate world. When interest rates go down, cap rates don't compress by the same amount and when interest rates go up, cap It's a muted impact and that's certainly what we're seeing in our asset sale processes as well.

Speaker 4

That's useful context. Thanks very much guys.

Operator

Our next question comes from the line of Robert Hope with Scotiabank.

Speaker 1

Good morning. First question, just on the commentary that you

Speaker 4

could beat your $6,000,000,000 to $7,000,000,000 That's been targeted over the next 5 years. Is this driven by successes so far or the line of sight on the pipeline or is it even the size of

Speaker 5

the global transition fund For the MAX Global Transition Fund?

Speaker 1

I would say it's the first two, Robert. Obviously, the pace since we set that target on our Investor Day last year has been very robust. And the comment we made at Investor Day, We think holds true today, which is our ability to outperform that target is going to be dependent. I think the words we used almost regrettably is on how many large chunky transactions can we do. And if you look over the past 6 months, we've seen Westinghouse get announced, we've seen Origin get announced.

Speaker 1

Those are the types of large Chunky transactions that can certainly push us above our run rate in terms of target. So it's definitely predicated on The transactions we've done to date, but as we look at the pipeline going forward, it still remains very robust. And we have a lot of confidence that we can continue to keep executing on some of those large chunky transactions and therefore Quite confident that we'll outperform that target that we set. All right. Thanks for that.

Speaker 1

And then just maybe on as

Speaker 4

a follow-up on that pipeline, Any geographies, technologies or kind of spin offs that Our most attractive, can you add a little bit

Speaker 1

of color where you're seeing the greatest opportunities? Certainly. And Maybe we'll answer the question a slightly different way. There is certainly a dynamic In terms of where we're seeing the pipeline shift. And in the last few years, we've been very proud of our activity.

Speaker 1

We're thrilled about the Investments we've made in investing in a lot of high quality developers, ones in the United States that are going to benefit Tremendously from IRA businesses like Exelio in Europe. But over the last few years where We haven't seen as much growth capital deployed is either into operating assets or into public companies. And I think Origin is an example of the latter changing and I think we expect that Continue. We are seeing more opportunities in the public markets today, potential public to privates. And then for the first time in a few years, we're beginning to see a number of very attractive opportunities to buy operating assets at Very attractive value entry point.

Speaker 1

So I would say that's probably the biggest dynamic in terms of what we're seeing change in our pipeline. Appreciate the color. Thank you.

Operator

Our next question comes from Rupert Merer with National

Speaker 6

Bank. Good morning, everyone. A couple of follow-up questions here. First, with your investment into the Indian market, can you give us an update on your thoughts about global diversification and your appetite For investing into developing markets, how much of your portfolio could that make up?

Speaker 1

Yes. It's a great question, Rupert. And I would say 2 things. 1, our target balance hasn't changed. I think for years, we've said we like to be approximately 3 quarters in developed markets And no more than probably a quarter in developing markets.

Speaker 1

If you actually look at our business today and if we look Yes. At our pipeline, given the scale of some of the transactions we've done recently and the fact that our large scale deals tend to be in developed markets, We're actually probably closer to 80% now in developed markets and 20% in developing markets. And that's not because we don't do lots of deals In our core developing markets, we do and will continue to do. It's just very simply that the largest deals we do Tend to be in developed markets and that overweights those when we look at our global diversification. So I think historically, we've said 75,000,000 that remains true.

Speaker 1

But on balance today, we're actually closer to 80,000,000.

Speaker 6

Okay, great. And then on the pace of investment and looking at some of these large chunky deals, The next energy transition fund that you raise could be quite large and we have seen the participation of BEP And deals come down, where do you see that participation heading in the future? Is there any risk that Say the scale of the amount of capital that you have to invest and crowd out the public participation?

Speaker 1

No, I wouldn't say so. And what perhaps the easiest way to frame that is Very similar to the 1st transition fund, we expect that to be the single largest LP in the 2nd global transition fund. And that's consistent with Brookfield's approach across all of its flagships. And then similarly, when we do These large deals, Beth will continue to be an active participant in the co invest in those deals. And what I would say is, In those large deals, it's great having those co invest partners.

Speaker 1

And even if that means that On a look through basis, BEPS economic ownership might be less than say 25. That's fine. Brookfield still controls the investment. And really what it allows us to do is it allows us to target those larger transactions where we see less competition and very attractive risk adjusted returns, but it also allows us to Our business increasingly as we do more in different types of those transactions around the world. So we view it as incredibly beneficial to bep.

Speaker 1

And I don't know if this is where you are going with your question. I think one thing that's important to highlight is, As the largest LP in those funds, Beth is entitled to priority co invest just like any major LP. And therefore, the amount of economic exposure that we're taking to these investments is at our discretion. We can target The amount of co invest that we would prefer and therefore the amount that we're choosing to invest is at our discretion and based on What we see as most attractive from a capital deployment perspective as well as achieving the diversification objectives that we have for the company. So, yes, on some of the big deals, maybe our percentage goes down a little bit, but we see very few negatives and a whole bunch of

Operator

Our next question comes from Andrew Kuske with Credit Suisse.

Speaker 7

Thanks. Good morning. I guess it's a big picture question. And when we look at things like Origin, you've got assets in the marketplace that maybe trade The discounted value given some of the fossil exposure, how do you think about allocating into those kinds of businesses On an accelerated basis in part because of what's happening on the global transition funds. And then what does that do to a composition of generation at that itself?

Speaker 1

Yes, certainly great question, Andrew. What I would say is we're thrilled about the Origin investment. It really ticks 3 important boxes for us. It's a large scale transaction. It has an incredible decarbonization impact and it's very attractive risk adjusted returns.

Speaker 1

If we could do more deals like that, we'd obviously be thrilled. But I think there's really 2 Important things to highlight. One is when you look through the thermal exposure that The company is taking on by doing transactions like Origin. 1 is, it's incredibly minimal in the context of our global business. And 2, it is incredibly short lived because our whole business plan is to build out renewables as quickly and as attractively as possible to create clean low cost replacement capacity for that thermal generation fleet.

Speaker 1

Part of the reason why we like these investments is The key value drivers around a transaction like Origin are almost no different than the key value Drivers around a down the fairway renewables developer. If we can develop renewables at a fast pace at very Attractive levels, it's going to drive incredible value for us within the Origin platform. The other thing that I think is very important Around our thinking when we look at these go where the emissions are deals and we've really done 2 of them now, Inter Energy and Origin is we focus on transactions where the de carbonization objectives And the financial performance are directly complementary. If we can decarbonize these platforms, It's going to dramatically enhance value because in both Inter Energy and in Origin adding low cost Clean Renewables dramatically enhances the value and the cash flows of the broader platform. So we like these transactions where By decarbonizing the platform, we're actually going to dramatically enhance and derisk the cash flows.

Speaker 1

We think they're great investments and ones that we're uniquely positioned to execute.

Speaker 7

I appreciate that. And then maybe just continuing on that value enhancement strategy, you've got a lot of different levers to pull from a funding standpoint, whether it be capital recycling, Just cash flows and self co investments to fund. How do you think about the use of that fee as a currency? Because we saw one of the other Brookfield affiliates Use their C Corp vehicle as part of a currency in a transaction. I guess, holistically, how do you think about that stacking up against all the other options you have?

Speaker 1

Yes, certainly. I would say when it comes to our funding Strategy, it remains what it has been in the past and the way you framed the question was very helpful. We do have a number of levers within our Existing portfolio to create a self funding business model and that's up financing of our existing assets and asset recycling primarily. But when it comes to considering other forms of funding, we'll make 2 comments. 1, When it is incredibly valuable and strategic, we will the option of using equity is always on the table.

Speaker 1

We always look back at the example of TerraForm. And if we see those high value and strategic opportunities where we can use our shares to effectuate A transformational transaction, we'll always consider it. The other thing I would say is, If we continue to see an exceptionally robust pipeline of very attractive high returning deals, we may look to augment our funding strategy. But that would be a good news story because of the robust pipeline of high returning accretive deals. And that will obviously be subject to what the market gives us in the next 12 or 24 months.

Speaker 7

Okay. That's great. Thank you.

Operator

I'm showing no further questions in queue at this time. I'd like to turn the call back to Connor Teske for closing remarks.

Speaker 1

Well, thank you everyone for joining our call today. We continue to always appreciate your interest and support of Brookfield Renewable and we look forward to updating you on our Q2 conference call in a few months. Thanks and have a great day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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