Brookfield Renewable Partners Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2024

There are 10 speakers on the call.

Operator

Thank you

Speaker 1

for standing by, and welcome to the Brookfield Renewables Third Quarter 20 24 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 session. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Conor Teske, Chief Executive Officer.

Speaker 1

Please go ahead, sir.

Speaker 2

Thank you, operator. Good morning, everyone, and thank you for joining us for our Q3 2024 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 2

For more information, you are encouraged to review our regulatory filings available on SEDAR, EDGAR and on our web site. On today's call, we will provide a review of our Q3 performance and how we are able to both successfully monetize assets at great returns in the current environment as well as find opportunities to deploy significant capital into growth at good value. Then Ignacio Gomez from our investment team will speak to some of our successful asset monetizations announced this past quarter. And lastly, Wyatt will conclude the call by discussing our operating results and financial position. Following our remarks, we look forward to taking your questions.

Speaker 2

We had a successful quarter with the business performing well. We delivered record funds from operations for the Q3, benefiting from asset development, recent acquisitions and strong all in pricing. On the back of our strong results year to date and our outlook for the remainder of the year, we continue to expect to achieve our 10% plus FFO per unit growth target for 2024. We have continued to diversify our business across the most attractive power markets globally, while concentrating on the lowest cost matured technologies, which today represent the most promising and viable solutions to meet accelerating electricity demand growth from digitalization and electrification. The outlook for our business continues to improve driven by increasing demand for clean power as the robust investment by the large global technology players in data centers and semiconductor chips is now extending to energy capacity.

Speaker 2

Power is increasingly the bottleneck to enable data center and AI development and we are seeing these businesses ramp up their efforts to lock in supply to ensure that they can achieve their own growth targets. This accelerating increase in demand for new power is being driven by corporate off takers and requires a significant build out of renewable generation given its position as the most cost competitive source of bulk power in most markets irrespective of incentive schemes. Our scale and geographical and technologically diversified business is uniquely positioned to meet this insatiable demand in all political environments. To reinforce this point, because our business is focused on markets, which are seeing the greatest amount of corporate demand and is focused on the technologies that are most cost effective that are the most cost effective electricity solutions, we are largely insulated from any potential regulatory or subsidy changes and we do not expect the recent election results to change our business model or growth outlook. This past quarter saw several agreements announced by global technology players to restart or enable the development of nuclear capacity.

Speaker 2

These agreements are a powerful indication not only of the magnitude of demand for clean electricity over the coming years, but of the types of solutions that are needed. The technology leaders require reliable, low cost, 20 fourseven scale power solutions and they are increasingly looking to a small number of partners who they trust to deliver what they need, where they need it and when they need it. This environment is very constructive for

Operator

the development platforms we have acquired in recent years

Speaker 2

and we are well positioned to platforms we have acquired in recent years and we are well positioned to continue as one of the partners of choice to these companies. We are differentiated with our diverse 200,000 Megawatt Renewable Power Project Development Pipeline, approximately 90% of which is located in the top 10 data center markets globally. Added to that, with our Westinghouse Nuclear business, which has design and engineering capabilities to deliver micro, small modular and utility scale nuclear solutions, we are in an enviable position globally. As outlined at our Investor Day at the end of September, this year will be our largest for both asset recycling and investment into growth. To date, we have generated approximately $2,300,000,000 of proceeds from asset monetizations, resulting in returns of 2.5 times our invested capital and IRRs on these investments of greater than 20%, well in excess of our corporate targets.

Speaker 2

Given other ongoing sales processes, the bids we are seeing in the market and our pipeline of assets that will be ready for sale in the coming quarters, we expect to deliver incremental strong monetizations in the future. During the same year to date timeframe, we have committed and deployed over $11,000,000,000 of equity into growth, including our proposed acquisition of NaoeN, which remains on track to close on our expected timelines as we continue to progress through the regulatory approvals and anticipated undertakings, which are all well advanced. We recognize that some may question how a market can be attractive for deployment and monetization at the same time. While every transaction has its own dynamics and there will be exceptions to any broad based generalizations, we see a simple bifurcation in the current market. High quality, de risked and cash generative assets are seeing very strong bids, while large businesses with ongoing capital needs for development and construction are seeing a scarcity of capital to fund their growth pipelines.

Speaker 2

This creates a tremendous opportunity for those equipped to deploy capital at attractive value entry points to acquire growing businesses or fund existing operations. This constructive environment also allows us to monetize more mature assets assets and recycle the proceeds back into accretive new investments under an attractive and high returning self funding model. We feel this market is particularly attractive for a number of the renewable development platforms we have acquired in recent years. Last week, we announced a new partnership with a global leader in offshore wind, making our first direct investment into this technology. We have always taken a thoughtful approach to investing in technologies that are new to our platform.

Speaker 2

For example, almost a decade ago, we were consciously not a first mover into solar, because we believe that much of the initial capital invested in the space was subject to return drivers outside of our control. Notably, the pace of technological improvement and cost declines, the ramp up of supply chain and the assumed trajectory of growth. While some players got these initial bets right and others wrong, we waited until we felt the sector was more appropriately derisked. Once the sector matured, we moved with conviction, securing attractive value entry points, often capitalizing on situations of capital scarcity, where some of those earlier investments didn't go as planned. Despite our cautious initial approach to the asset class, we have since found no shortage of opportunities and today are one of the largest solar developers in the world, if not the largest.

Speaker 2

We have taken a similar approach to investing in offshore wind. We view offshore wind as a mature, fast growing and scale renewable technology with critical attributes for certain markets, such as providing a differentiated energy load profile, high capacity factors and limited onshore land requirements. However, up until recently, many of the opportunities we looked at faced long lead times between capital outlays for development and project commissioning. These challenges deterred us from investing over the past several years, especially given the other opportunities we were seeing in the market. Today, we are seeing more opportunities to invest in projects that are operating or where the cash flows are more significantly derisked at attractive risk adjusted returns.

Speaker 2

We agreed to partner with a global leader in offshore wind to acquire a 12% interest in a portfolio of 3,500 megawatts of operating capacity in the UK for an enterprise value of $2,300,000,000 The portfolio is 1, secured by long term government backed inflation linked contracts for difference 2, has approximately 90% of operating costs fixed through long term O and M, transmission and lease contracts and 3, comes with no development or construction risk. We are thrilled to partner with a global leader in offshore wind who will continue to own a 38% interest and operate the portfolio, which we expect to generate returns in line with our targets. With that, we will now turn it over to Ignacio to discuss our recent asset monetization.

Operator

Thank you, Conor, and good morning, everyone. As Conor noted, this will be our most successful year for asset recycling ever, as we have already generated record proceeds year to date and continue to see robust demand for high quality, cash generative operating platforms, and in particular, those with embedded growth opportunities and capabilities. While we underwrite our investments on a wholesale maturity basis to deliver our target 12% to 15% returns, we can often enhance these returns by monetizing mature assets to buyers with a lower cost of capital, who value the long life, derisked infrastructure like cash flows of renewable power projects. Asset recycling also represents a highly accretive way to fund our business and contributes to our sustainable self funding model. Important to successful asset monetization is the strength of our balance sheet, which enables us to be patient and sell assets when markets are constructed.

Operator

Throughout 2024, we have seen a very robust bid for high quality assets and platforms. And against this market demand, we have been successfully recycling capital from our existing asset base and returned significantly above our targets. While every investment is different, in each case, these results were driven by acquiring for value, improving the assets through the execution of our business plan and monetizing opportunistically. In September, we reached an agreement to sell Saeta, which we acquired in 2018 to retake private during a period of market uncertainty that created an attractive value entry point. The portfolio consisted of high quality, contracted assets, where we saw an opportunity to add value, leveraging our scale and operating capabilities.

Operator

Following the acquisition, which we executed on a bilateral basis, we implemented our business plan, divesting non core assets and bringing over best practices from our experience, operating renewable assets globally to enhance operations and reduce costs. We also optimized the capital structure and established a development function to focus on growth. With the in house development team that we built and supplemented by our access to capital, we're able to grow the business and develop a very attractive pipeline of projects. The development team remains in place and we continue to carry outside that strategic growth plan going forward with the new owners. We agreed to sell the company excluding the contracted 350 Megawatt of concentrated solar power assets, which we continue to own and operate to a leading global renewable energy company as part of their strategic entry into the Iberian region for an equity value of $730,000,000 With the sale, we generate total proceeds of over 3 times our invested capital over a 6 year hold period, crystallizing strong returns for our shareholders.

Operator

In 2017, we acquired a 25 percent interest in First Hydro, the leading UK hydro business, providing approximately 75% of the pumped storage capacity and 45% of the hydro capacity in the market. We recognize an opportunity to use our decades of experience in owning and operating hydro assets to implement several value generative initiatives. Upon acquisition, we helped execute and de risk an asset refurbishment program that extended the life of the pump storage facilities by over 40 years. We optimized the capital structure by refinancing the long term debt at the business and enhance the commercial strategy. We recognize the several market dynamics and increasing importance of energy storage and scale disposable clean power, which led us to an increase in revenues and record earnings under our ownership.

Operator

In September, we reached an agreement to sell our interest in Trust Hydro for $350,000,000 generating over 3.5 times our invested capital since acquisition and are delivering the buyer a highly strategic asset that will continue to provide critical grid services for decades to come. During the quarter, we also agreed to sell a 50% interest in our separate flood wind portfolio, where we executed 1 of the largest wind repowerings projects globally, increasing generation by approximately 25% and extending the assets useful life by approximately 10 years. We completed this repowering project on time and on budget during the pandemic, when the sector was being impacted by supply chain challenges, a testament to our procurement and development teams. On closing, we will generate almost 2 times our invested capital on the portion sold for $415,000,000 while still retaining a 50% interest and operating the asset where we are completing other value enhancing initiatives. And finally, today we're one of the leading renewable energy operators and developers in India, having prudently built a regional presence since entering the market in 2017 off the back of the broader book free business in the country.

Operator

This week, we signed an agreement to complete our 1st full cycle investment in the country by selling a 1600 megawatt portfolio of operating and under construction wind and solar assets to a large renewable player at our target returns. We expect to close the transaction in parts in the Q1 of 20252026 subject to customary closing conditions. We were able to add value to this portfolio through the optimization of the capital structure, operational and working capital improvements and through organic development. With that, I will pass it on to Wyatt to discuss our operating results and financial position.

Speaker 3

Thanks Ignacio and good morning everyone. Our operating business had a strong quarter delivering record fund from operations generating $278,000,000 in the quarter or $0.42 per unit up 11% year over year. With an increasingly diversified portfolio of operating assets, limited off taker concentration risk and a strong contract profile, our cash flows are highly resilient. These results and our outlook for the remainder of the year have us positioned well to deliver on 10% plus FFO per unit growth. Our hydroelectric segment benefited during the quarter from solid generation and we continue to see strong demand for these assets.

Speaker 3

This quarter, we successfully executed 2 contracts with U. S. Utilities at an average price of almost $90 per megawatt hour for an average duration of almost 15 years. The favorable contracts will result in a significant uplift in revenue per year and are expected to result in up financing proceeds of up to $500,000,000 which when redeployed at our target returns is expected to generate meaningful incremental annual FFO for the business. With an additional 6,000 gigawatt hours of generation available for recontracting over the next 5 years and an increasingly constructive pricing environment for our hydro portfolio, we have significant capacity across our fleet to execute on similar contracts that we expect to contribute additional FFO and generate a highly accretive funding source for our growth.

Speaker 3

Our wind, solar, distributed energy and sustainable solutions segments generated record results benefiting from our acquisitions and development activities as well as continued tailwinds at our Nuclear Services business, Westinghouse. Our balance sheet continues to strengthen as we ended the quarter with $4,600,000,000 of available liquidity and our funding model is working well. As Ignacio noted, we were successful in executing on our asset recycling initiatives this quarter, generating record proceeds so far this year and have a positive outlook to continue to rotate capital and generate strong returns going forward. In addition, we expect to execute a total of $30,000,000,000 in financing this year, generating $700,000,000 in total up financings, positioning us well to fund our growth activities going forward. In closing, we remain focused on delivering 12% to 15% long term total return for our investors by prudently deploying capital and executing on our operating initiatives.

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 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.

Speaker 1

Certainly. And our first question for today comes from the line of Sean Steuart from TD Securities. Your question please.

Speaker 4

Thanks. Good morning everyone. I want to start with the U. S. It's a big part of your advanced organic pipeline.

Speaker 4

And Connor, you referenced comfort that growth will it will remain a growth focus for Brookfield Renewable. I'm wondering if you can give us more detailed thoughts on the U. S. Return profile and growth potential of tax credits are changed or appealed in the events that the Republicans take the House and Trump can advance that agenda?

Speaker 2

Great. Good morning, Sean. Certainly, no doubt a big topic this week. Maybe let's come at this 2 different ways. We'll come at it from the macro and then we'll come at it from the perspective of our business in particular.

Speaker 2

From the macro perspective, we would suggest that the government support and regulatory processes and procedures that most commonly touch our business generally have very strong bipartisan support. And yes, while a new government may tweak or make changes to that, our expectation is it would not be material. However, what's probably more important from the macro side is two things. 1, anytime a new administration comes in and this one we expect to be no different. We expect to see a period of tremendous fiscal support to drive industry and manufacturing and data centers in the United States and all those things are going to need incremental power.

Speaker 2

And that's going to be very beneficial for renewables. That's going to be beneficial for gas. That's going to be beneficial for nuclear. Further, a Republican administration with a focus on domestic growth should no doubt provide longer term tailwinds that will increase power demand, which again renewables as the lowest cost provider of that power should be well positioned to benefit from that incremental demand. Now maybe then switching gears to talk about our business.

Speaker 2

For years now, we've been growing and diversifying our business. We're proud that we have one of, if not the most globally diversified renewables business across both geographies and technologies. But in particular, for years, we've been positioning our business to rely on corporate demand and low cost energy production, not government subsidy to ensure that in periods of regulatory uncertainty, our business will continue to perform. Today, our business is highly focused in both the lowest cost technologies and the regions that are seeing the greatest growth in electricity demand, which ensures that we are largely insulated from any potential regulatory or subsidy changes. And therefore, we don't expect the recent election results to change our business model, our growth outlook or the return profile we will seek to achieve when deploying capital into growth.

Speaker 2

Maybe just to finish by putting it bluntly, we are the low cost producer of a critical commodity that the world, particularly the United States is going to need more of. And therefore, we feel that our position is very strong, particularly as we move forward and see more growth in the United States.

Speaker 4

That's great detail. Thanks for that. Second question relates to offshore wind. It looks like the Orsted transaction is, I would say, more of a focused financing deal with fixed horizon for you guys, more so that as opposed to a strategic push into the asset class. Can you speak to larger growth aspirations in offshore wind having referenced the risk profile now fitting into parameters that work for you guys?

Speaker 2

For sure. Maybe just to put some context on the transaction. 1st and foremost, we are thrilled to be partnered with who are the global leader in offshore wind. And we are thrilled to be partnered with the global leader in perhaps what is one of their highest quality, largest and most established offshore wind platforms around the world. And the quality of the assets and the quality of the partner here is really what attracted us to the investment.

Speaker 2

In terms of the broader asset class, we're very bullish on offshore wind. We think it is a large fast growing asset class. It's critical in many markets around the world and it needs significant amounts of capital. And perhaps some of the headwinds in the asset class over the last 2 or 3 years position us as a capital provider who can support some businesses that maybe have less access to capital today than they have in the past. We will review opportunities in offshore wind the same way we review opportunities in any asset classes, judging the risk and return.

Speaker 2

But what I would say is, we see far more attractive opportunities in that asset class today than probably at any point in the last 5 or 6 years. And therefore, we hope there will be more to come.

Speaker 4

Thanks for that, Conor. That's all I have for now.

Speaker 1

Thank you. And our next question comes from the line of Robert Hope from Scotiabank. Your question, please.

Speaker 5

Good morning everyone. I want to circle back on the U. S. And maybe dive a little bit deeper into your comments about being the low cost producer. We understand that the tax benefits often do pass through to customers, but can you maybe dive in a little deeper on what asset classes could be more impacted by changes to tax policy there?

Speaker 5

And could that shift more towards wind versus solar? Or which asset class do you think has the best cost outlook regardless of subsidies?

Speaker 2

Thanks, Rob. In terms of which asset classes are most susceptible to change, we would purely be speculating at this point. Obviously, the Republican administration has made some comments about certain asset classes. What we would say in general, however, and how we view the business is if you are focused in asset classes like onshore wind and solar, which are not the cheapest cost of electricity production from renewables, but the cheapest cost of electricity production bar none. Today, if those asset classes benefit from tax credits or subsidies, all that allows us to do is simply offer a cheaper PTA to the end customer.

Speaker 2

In the event that any of those tax subsidies are rolled back or reduced, we will simply flow the lack of those subsidies through a higher PPA price to preserve our returns, our project returns. And the key point there is because onshore wind and solar are so much cheaper than the alternatives, there is room to do that and still be the cheapest form of bulk electricity production. That is why we feel the vast, vast majority of our business where we do almost entirely all of our renewable power development in the United States is so insulated from any changes. Clearly, the sectors that potentially could be more exposed are higher cost sectors or sectors that are reliant on government subsidy or government support to either make them economic or to support their go forward growth. And there are a few of those sectors.

Speaker 2

We are just fortunate that it's never been part of our business focus to invest in those. And that's why we're relatively calm about any change in government today.

Speaker 5

Appreciate that color. And then maybe pivoting over to the Infineum investment. And more broadly, how are you looking at, we'll call it, nonrenewable power investments, the potential to be a little bit more on the bleeding edge? And I guess overall with such a large renewable backlog, how do these kind of investments fit in the framework?

Speaker 2

Sure. Our business today is almost entirely renewables and that continues to be the bulk of our growth today and our expected growth going forward. What we would say, however, is while we've dramatically enhanced the growth of our renewables business over the last several years, we've been selective in investing initially into a number of asset classes that we think will be critical to clean energy grids of the future. And the most notable ones there that we've invested in are nuclear, batteries and biofuels. When it comes to assessing any investment into new asset classes, I would say our approach is pretty robust.

Speaker 2

And we have the luxury of investing 1,000,000,000 if not tens of 1,000,000,000 of dollars into renewables growth each year. And that gives us a very strong benchmark or threshold against which to adjust the risk adjusted returns of any other asset class or any other investment we make. And if we're investing in something that has either slightly higher construction or development risk, slightly higher revenue construct risk, is a less mature technology with a less mature supply chain. We of course need to be significantly rewarded for taking on those exposures relative to what we could achieve by just investing further in wind and solar. And take the example of Infinium here.

Speaker 2

Infinium, it is a sustainable aviation fuel is a new asset class for us. But really what we're investing here is the build out of a facility that is not the first of its kind. It's a proven technology. Similar facilities have been built out before, but exactly similar to our wind and solar business, we are building a facility that is backstocked by long term take or pay contracts with corporate high quality corporate off takers. And we saw a lot of similarities to producing this sustainable aviation fuel similar to how we do green power.

Speaker 2

And that's what gets us excited and gives us comfort about an investment like Infineon.

Speaker 5

Great. Thank you for the color.

Speaker 1

Thank you. And our next question comes from the line of Nelson Ng from RBC Capital Markets. Your question please.

Speaker 6

Thanks. Hey, Conor, you've talked a lot about the U. S. Sector and I have one more question for you in terms of the U. S.

Speaker 6

Elections. So obviously, with the elections outcome, we saw a big drop in share prices of many companies, even companies that don't have any U. S. Exposure. Do you generally see more opportunities to deploy capital now with publicly listed names or even in projects where sponsors may be pulling out?

Speaker 6

Like do you have a I would say like a shopping list of companies or projects that are potentially significantly undervalued now?

Speaker 2

Perhaps the way to answer that question is very simply our investment pipeline remains incredibly robust. And for years now, our ability to deploy scale capital has been predicated on 1, our ability to do large scale transactions 2, our operating capabilities, particularly around power marketing and 3, our access to capital. And perhaps tying that back to your question, the variability and volatility in share prices following the election results, all that will do is reduce access to capital for those that are reliant on the public markets. And I wouldn't say that's a new trend for us, but simply plays into a trend we've been seeing for a while. And as a result, we're very encouraged about the investment pipeline we have today.

Speaker 2

As mentioned at our Investor Day a couple of months ago, we continue to expect to deploy increasing amounts of capital into growth in the future. And that's very simply as a result of the demand we continue to see for our product and how our business model is well positioned to execute on that. I really think it just the volatility in the stock market after results just plays to that theme of less access to capital for some market participants.

Speaker 6

Great color. And switching gears a bit on the hydro side, in terms of the $90 per megawatt hour and you mentioned that I think it's contracted to U. S. Utilities. Going forward, when you re contract additional facilities in the U.

Speaker 6

S, do you expect or are you seeing more direct demand from, let's say, big tech or data centers? Or do you expect re contracting to continue to be with U. S. Utilities?

Speaker 2

It's a great question. The point we would highlight here is power demand is going up very, very significantly. Whether we sell that directly to an end customer or we sell it to a utility who then passes it to an end customer or we sell it to an end customer, but through a virtual PPA that uses the electricity, And that shows up in our prices and the demand for our power, particularly the clean dispatchable baseload power that can come from hydro or nuclear. That comes through in the contract, whether it's a direct, a virtual PPA or through a utility. Given what we're seeing in the market, I'd say we're going to see a mix of all those things.

Speaker 2

But the important takeaway from our perspective is regardless of how that power gets to the end consumer, the overwhelming things is the increase in demand, the increase in volume and how that is driving a higher price in the contracts we are seeing.

Speaker 6

Great. Thanks, Connor. I'll leave it there.

Speaker 1

Thank you. Our next question comes from the line of Rupert Merer from National Bank. Your question please.

Speaker 7

Hi, good morning everyone. Connor, you highlight the bifurcation in valuation between mature assets, more complex development assets. We're also seeing some weakness in the stock market and the volatility that you discussed. And we do seem to be seeing a wave of privatization. So I was wondering if you could quantify the difference in return expectations that you see with this bifurcation between mature and immature and between public valuations and private valuations?

Speaker 2

It's a great question. And it's obviously going to differ by market, by asset class, by size of transaction. But we'll try and be as constructive as we can. And we'll share a couple of data points with you. Within some of our development platforms and we have a number of scale development platforms in core markets around the world, Probably the easiest place to see the difference between development returns and the market price for contracted operating assets is when you look at the development margin within an individual developer.

Speaker 2

And I would say in general, our best developers around the world are seeing developer margins north of 400 basis points or 4.50 basis points. And we have some developers around the world that are consistently delivering development margins in the 500 basis point to 600 basis point range. And depending on which asset class and in which geography that might be, that might mean you're developing at, call it, 13% to 15% hold to maturity returns and selling down at 8% to 10% or in other markets that might mean you're developing at 15% to 17% and selling down at 10% or 11%. So I would say that's probably the delta we're seeing in our most high performing and most attractive markets. Great.

Speaker 2

Well, thank you

Speaker 7

for the color. And Wyatt, so you've highlighted the contracts you signed recently, some attractive prices, dollars 90 a megawatt hour, I think you suggested. And if we look at the growth in demand in the U. S. For power for data centers, it does seem like there's more demand than supply today.

Speaker 7

Supply is going to have a hard time keeping up. How price sensitive do you think the market is? How high can power prices go before your buyers you think will hit the pause button?

Speaker 3

Yes. Look, Rupert, what I would say is that I think from our perspective, we thought that showing the $90 or sharing the $90 per megawatt hour number was very constructive in the sense that there have been a number of transactions recently around the nuclear space that were also in and around those numbers. Not all of it was fully publicly disclosed, but I think the market is settled around it being around those numbers. And I think from our perspective, what we really want to highlight is that for a dispatchable or baseload clean generation, the demand for our product is as strong as ever. And you can see it across multiple different markets with multiple different buyers.

Speaker 3

And that is obviously a very constructive thing. In terms of how high the price can go, look, we don't have a crystal ball that's any better than anyone else. But I think from our perspective, we are seeing, especially for the hydros, but on a broader basis for all of our assets that there is a very constructive market out there and that's what we're capitalizing on.

Speaker 2

Great. I'll leave it there.

Operator

Thanks for the color.

Speaker 1

Thank you. And our next question comes from the line of Mark Jarvi from CIBC. Your question please.

Speaker 8

Yes, good morning everyone. Maybe just going back to the U. S. Election impacts and given there's some uncertainty, what do you think happens on M and A in the U. S.

Speaker 8

Market and being able to valuations on development pipeline? Is there a chance that any of your ongoing asset sales in the U. S. Take a pause? What do you think you have to see for clarity before the market maybe opens up again?

Speaker 2

Hi, Mark. If they are, we don't expect it to be material. The nature of the just speaking, sorry, to be redundant, but going back to that bifurcation that we're seeing in the market, the things that we are selling are heavily contracted de risked, high quality cash generative operating. These things are pretty embedded cash flow streams at this point that aren't reliant on government subsidy or support programs. So, yes, I think everyone's probably going to digest the news of this week, but we don't expect it to have a material impact on the types of assets that we are selling in the current market.

Speaker 2

Where there could be opportunity, it really ties back to the question that was asked previously is, does the uncertainty of a new administration in some of the positions they might take in the future, reduce access to capital for those that are reliant on it, particularly in the public markets. And that could actually lead to an increase in activity for us on the investment side. But we don't really foresee any material change in what's going to happen on our asset sales side.

Speaker 8

Okay. And just coming back to the U. S. Hydro assets, some buyers, large tech buyers really focus on additionality, Microsoft deals kind of carried that way. Are you seeing any other change in tone around other large tech buyers in terms of additionality constraints?

Speaker 8

Or do you think they are willing to step to line to contract the U. S. Hydro to pay that premium?

Speaker 2

It's a great question. And there's no perfect answer to this. The real key is the broader market needs more power. And yes, certain buyers are more, axed to acquire power from new build. But the broader market just needs as much generation, particularly low cost generation as it can get.

Speaker 2

So it doesn't matter if it's new build or existing power, there is still very significant demand. What we would say is given the scale of demand that we are seeing and particularly how it is accelerating going forward, different institutions and this extends beyond simply the technology companies, different institutions are taking differing views on how much additionality is required. Is it a completely new build wind and solar? Or is investing 100 of 1,000,000 of dollars to enhance the capacity, extend the life of a hydro, does that meet the additionality requirements to meet their needs to sign a long term corporate contract. So I would say it's not a one size fits all scenario, but the broader demand is impacting both operating assets and new build assets the same.

Speaker 8

Okay. And then last question just again around the U. S. Market. View on nuclear and just the Westin Hills business, would you say the election outcome is neutral, positive to be determined at this point?

Speaker 8

Any initial perspective on that business?

Speaker 2

Yes, it's a pretty hard positive in our minds. Obviously, this administration has expressed support for nuclear. And maybe it's worth just taking a minute to explain Westinghouse's business and how it can benefit as nuclear grows going forward. Westinghouse really has 2 components of its business model. It is the largest technology product and service supplier to the nuclear power generation fleet globally and in particular the United States.

Speaker 2

So any growth or activity within the nuclear sector, Westinghouse will benefit whether it's from services, capacity upgrades, life extensions, fuel supply, any growth or activity in the existing fleet is positive for Westinghouse. But then in addition to that, Westinghouse. But then in addition to that, Westinghouse has not only the leading large scale nuclear reactor around the world, the AP1000, what might not be appreciated is Westinghouse also has the leading SMR, small module reactor technology. And what's unique about Westinghouse's SMR technology is almost every other, if not every other SMR technology around the world is a first of its kind. And first of its kind go through certain struggles in permitting, in design, in construction, etcetera.

Speaker 2

Westinghouse's SMR technology is the AP-three hundred. It is very simply the downsized AP-one thousand. It is the same design, the same technology, the same fuel. And therefore, as not only the large scale reactor market grows as well as the SMR reactor grows, Westinghouse is exceedingly well positioned to be a leading and major participant in any new reactor growth in the United States or more broadly around the world. So how are we viewing Westinghouse?

Speaker 2

It's not only going to benefit from the growth in nuclear in its core services business, but also in terms of new reactors. And then the additional benefit for us is we are uniquely positioned as the only renewable power player globally that can offer nuclear solutions that can complement our wind and solar offering to our customers. And we feel that's a very, very enviable position to be in today, particularly with the largest corporate clients like the large tech companies.

Speaker 8

Okay. Thanks for the time today.

Speaker 1

Thank you. And our next question comes from the line of William Crippen from UBS. Your question please.

Speaker 9

Thanks very much. Good morning. Sorry to do this, but just coming back to the policy point here, obviously there's been a lot of hand wringing on what happens to

Speaker 8

the

Speaker 9

ITC. A lot of people forget it's been around since 1978 in some form and has been extended under multiple administrations since that time both Republican and Democratic. So I generally agree with you. I think any risk of change there is very, very low. But more to the point, I think based on our conversations over the last few days, it seems like a lot of investors have actually forgotten about the IRS guidelines around safe harboring, which potentially enable developers to lock in the current ITC level through 2029.

Speaker 9

Just want to give you an opportunity to talk about maybe what you're doing on that front and help maybe assuage some of these concerns about the impacts of potential policy change?

Speaker 2

Yes, certainly. It's a good point. And I think the point we would reiterate most specifically is 2 things. One, we would highlight your point that many of these support programs have been along a lot longer than just the previous administration. They date back far before that and importantly have very strong bipartisan support.

Speaker 2

It's very well known and that many Republican states were actually the largest beneficiaries of IRA. So while we wouldn't rule out some changes to those tax credits and things like that, if they are going to get changed, we argue is we don't expect it to be meaningful. And even if it is, as discussed previously, our business is well insulated. Maybe just piggybacking on your second point, I might come at it from a slightly different perspective, which is the scale of our business, both globally and in the United States, really puts us in a favorable position that we are extremely well positioned to handle any changes, whatever they might be. We have globally diversified supply chains.

Speaker 2

We have one of, if not the largest renewables business in the United States that can take advantage of any of the policies and procedures that like the ones you mentioned. And we're always across those different initiatives to de risk our broader business. It doesn't end solely at tax credits. It goes to things like supply chain and procurement as well. And regardless of what changes come, we think our business will be well positioned and we've just we really struggle to see a situation where we don't continue to grow and accelerate our growth in the United States.

Speaker 9

Great. Thanks very much. And just last small one here, but could you talk to some of the year on year drivers you're expecting to contribute to what appears to be accelerating 4th quarter FFO per share growth implied by the guidance?

Speaker 2

Yes, sure. Perhaps I'll start and then Wyatt, please jump in. I would say 2, 3 things and Wyatt if I'm missing any of the big ones, let me know. One is, we've obviously deployed an incredibly significant amount of capital into growth, both M and A and development over the last 12 months and that is just increasingly run rating through our numbers. And particularly the deployment since Q4 last year and maybe even some of the transactions will get done in Q4 that will begin to contribute this year, will be the biggest driver.

Speaker 2

There's no question. Secondly, a number of our businesses, are performing very well in particular some of the largest, most cash generative businesses, our hydro is in Colombia, Westinghouse, they continue to provide great tailwinds to our underlying earnings. And then the 3rd point I would make is we have announced some asset recycling this year. There are going to be some gains on sale that will contribute in the Q4 that will provide an additional kind of modest uplift versus the 2 more significant drivers of growth, the first two things I mentioned. Wyatt, I don't know, am I missing anything?

Speaker 3

You captured the big drivers. The only thing I would add is just and this is very routine across our business, but we are continuing to capture stronger prices, both in terms of the inflation indexation that is built into our contracts, but then to the point we've referenced a number of times around the hydros, just incrementally capturing more value in those. And so those that is also expected to benefit in the Q4.

Speaker 9

Got it. Thanks very much. That's all for me.

Speaker 1

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Connor Teske for any further remarks.

Speaker 2

Thank you everyone for dialing into our earnings call. We appreciate the ongoing interest and support of our business and we look forward to updating you with our Q4 year end results early in the New Year. Thank you and have a great day.

Speaker 1

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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Earnings Conference Call
Laboratory Co. of America Q3 2024
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