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Brookfield fund's Australian utility deal builds decarbonization portfolio


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Brookfield fund's Australian utility deal builds decarbonization portfolio

Teaming up with Singapore-based investment managers GIC Pte. Ltd. and Temasek Holdings (Pvt.) Ltd. to buy out Australian utility Origin Energy Ltd.'s energy markets business is a strategically sound transaction that will only enhance Brookfield Renewable Partners LP's decarbonization portfolio, industry experts said.

Brookfield and its partners will take over that segment, with EIG Global Energy Partners-backed MidOcean Energy LLC separately owning Origin's integrated gas segment, as part of a scheme implementation deed announced March 27 to buy out Origin Energy for A$18.7 billion. The Canadian renewables giant plans to invest up to US$750 million in Origin's energy markets business, which includes a 3,100-MW fleet of gas-fired generation and pumped hydro storage and 1,065 MW of wind and solar capacity, using funds from parent Brookfield Asset Management Ltd.'s US$15 billion Brookfield Global Transition Fund I.

The proposed deal is "consistent with Brookfield's strategy under its new line of Global Transition funds to acquire companies with more traditional generation sources and expand the portfolio with a buildout of renewables," analysts at Morningstar told clients March 27. "We believe a key strategic rationale for the transaction was Origin's large retail energy operations, which Brookfield can leverage for offtake for new renewable assets." Origin Energy serves 2.7 million electric and 1.3 million natural gas retail customers in Australia.

The capital plan for Origin's markets business calls for at least US$20 billion of additional investment during the next decade to build up to 14 GW of new renewable generation and storage facilities in Australia, according to a March 27 Brookfield investor presentation, including supporting the retirement of the 2,880-MW coal-fired Eraring Steam Power Plant in New South Wales, Australia.

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There are "33 TWh of customer demand providing opportunity to replace coal-fired power generation with low-cost renewable, storage and firming capacity by 2030," Brookfield noted.

BMO Capital Markets wrote March 27 that the proposed deal, due to close during the fourth quarter, "is highly strategic ... and has built-in upside potential," while UBS described the transaction as "more of an opportunity than a challenge."

Brookfield has been leveraging its first energy transition fund since the initial July 2021 close, buying Colorado-based independent power producer Scout Clean Energy LLC for US$1 billion and Maryland's Standard Solar Inc. for US$540 million in separate transactions in September 2022. Brookfield also formed a partnership with Canadian miner Cameco Corp. to acquire nuclear services provider Westinghouse Electric Co. LLC in an October 2022 deal with an enterprise value of about US$7.9 billion.

"While Origin is another large 'non-traditional' deal — similar to the Oct. '22 Westinghouse agreement (up to $750M equity) — we believe the Origin investment fits squarely into Brookfield's playbook and strengths," Wells Fargo Securities wrote March 28. "The essence of the strategy is to construct a sizable amount of renewable, storage and firming capacity (up to 14 GW over the next decade) to help Australia decarbonize and meet net zero goals."

Origin's energy markets business, meanwhile, saw its electricity gross profit decline A$183 million to A$39 million during the second half of 2022 compared to the same period the year before due to increased Australian wholesale prices and rising coal and gas fuel and procurement costs, the company said in a February investor presentation, though "market conditions eased" during the fourth quarter of 2022.

Gas gross profits, meanwhile, increased by A$145 million to A$393 million in the company's fiscal year 2023 half, which ended Dec. 31, 2022.

Outside of the US, Brookfield Renewable has also used the fund to form a 50/50 joint venture with SSE Renewables Ltd. to participate in the 1.4-GW Hollandse Kust West Offshore Windpark zone tenders in the Netherlands, among other transactions. Earlier in March, it acquired the remaining 50% of Spanish renewables developer X-ELIO Energy SL it did not already own.

Brookfield's robust M&A ledger has benefitted from rising interest rates, which gives it an edge over competitors with less access to favorable cost of capital.

"We saw tremendous opportunities in 2022 to buy high-quality renewables developers in our core markets at entry points that, quite frankly, we would have fallen out of our chair to execute on in 2021," Brookfield Renewable CEO Connor Teskey told analysts and investors Feb. 3 during a fourth-quarter 2022 earnings conference call. "We're still seeing attractive value entry points there and hope to execute some of those transactions in the near term."

As of the beginning of 2023, Brookfield Renewable had a 110-GW pipeline of clean energy projects, according to a February investor presentation.

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