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Brookfield Renewable CEO sees private asset buyers not yet daunted by high rates

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According to Market Intelligence, December 2022

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Brookfield Renewable CEO sees private asset buyers not yet daunted by high rates

While rising borrowing costs are not yet dampening private equity firms' ability to pay premiums for operating renewable energy assets, Brookfield Renewable Partners LP does expect rising interest rates to eventually erode high valuations.

"Rates can't continue to rise and valuations stay cemented where they've been for the last couple of years, so we're certainly taking that into account," Brookfield Renewable CEO and Managing Partner Connor Teskey told analysts and investors Nov. 4 during a third-quarter earnings conference call. "But to date, there's been a number of very recent high-profile transactions in the renewable space, and I think it would be very tough to make an argument that valuations have come down yet."

That does not mean, however, that asset recycling would be any less lucrative for the renewables giant. Even if interest rates increase, according to Teskey, development and operating improvement margins will not decline.

"Even if power or interest rates cause, let's say, the price of long-term contracted operating assets to decline a little bit and maybe returns going up a little bit, we are seeing development returns go up a proportionate amount as well," Teskey said. "We're still capturing the same amount of development margin or improvement margin, which means capital recycling continues to be a very value-accretive way to grow our business."

Brookfield Renewable continues to receive interest in acquiring both operating assets and projects under construction, Teskey said.

When it comes to buying development portfolios, Brookfield Renewable is still better positioned to take advantage of opportunities in 2022 than in 2021, even with interest rate hikes.

Several large-cap utility holdings companies like Duke Energy Corp., PG&E Corp. and American Electric Power Co. Inc., are marketing whole or minority stakes in their contracted renewables businesses, while Avangrid Inc. and Eversource Energy are pursuing similar strategies for their offshore wind portfolios.

"If you go back 12 to 18 months, there were a lot of development businesses sold in the United States and candidly, we looked at almost all of them and ... we bid at what we thought were attractive returns and we weren't very competitive in 2021," Teskey said. "And then 2022, we've used the same investment discipline and we've been successful on bidding on a number of those acquisitions, and I do think that demonstrates perhaps what is happening in the market where less sophisticated investors ... maybe don't have the access to capital that we do in more uncertain markets."

During the third quarter, Brookfield Renewable also announced a deal to form a strategic partnership with uranium miner Cameco Corp. to buy nuclear services business Westinghouse Electric Co. LLC for a nearly $8 billion enterprise value.

Under the deal, Brookfield Renewable, with its partners, will own a 51% interest, and Cameco will own 49%. Westinghouse is the original equipment manufacturer of more than half of the world's nuclear fleet.

"No matter where nuclear grows, Westinghouse is poised to benefit," Teskey explained. "If the growth comes from upgrades or life extensions of existing power generation plants, Westinghouse is well-positioned to benefit from that. If the growth comes from new build-out of large-scale nuclear reactors, Westinghouse is exceedingly well-positioned to benefit from that as the supplier of engineering and products to those build-outs."

During the third quarter of 2022, Brookfield generated $243 million in funds from operations, or 38 cents per unit, compared to $210 million, or 33 cents per unit, in the prior-year period. The S&P Global Capital IQ analyst consensus was 36 cents.

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