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Brookfield eyes development returns after reportedly pulling back on TerraForm bid

Despitereportedly withdrawing its bid for TerraForm Power Inc., Brookfield Renewable Partners LP may not be giving up muchin the way of growth, as it looks to unload certain assets and recycle thatcapital into development stage projects worldwide.

Freshoff its continued expansion into South America, Brookfield's renewableenergy arm indicated its in-house ability to develop and operate renewableprojects will underpin its core growth strategy, even though it is pulling backon a formal bid for distressed yieldco TerraForm Power, according to a Sept. 30note by UBS Securities LLC analysts around the company's analyst daypresentation.

BrookfieldRenewable CEO Sachin Shah further indicated to UBS analysts that the companywould look to sell its shares in TerraForm Power if the auction price was foundto be "satisfactory," or conversely, continue to consider a bid forthe company if the auction results are "disappointing."

Selective sales

Complicationsaround the TerraForm Power auction have not dissuaded the company from lookinginto its own strategic sales, which could generate additional liquidity.

"Weare not only generating a high return for our portfolio, but we are now lookingto selectively sell assets," Shah noted at the Sept. 29 analyst day."We have other assets in our portfolio in Canada and in Europe right nowthat would attract very high multiple and very high valuations."

Thosesales could help it raise cash to put toward its annual investment target of$500 million to $600 million targeting existing assets that could benefit fromthe company's operational expertise, Brookfield said.

Eventhough some of Brookfield's funds may be nearing the end of their term, whichrun between 12 and 14 years, the firm is open to the prospect of investorslooking to exit, but likewise advise that in order to capture the highestpremium, Brookfield would, "create some type of continuity vehicle andcarry on with the asset," Shah said.

Arbitraging capabilities

Pointingto its sale of aCalifornia wind farm last year, the company says it was able to realize a 30%internal rate of return on the project after it had financed, constructed andoperated the asset in house.

Thatbuild-and-sell model is something Brookfield says it intends to replicate moreoften, as it puts more resources toward its 6,800-MW internal project pipelinein hopes of finding yield where operational projects have not provided.

"Havinga development capability means that when too much capital is chasing M&A,you can slow down your M&A program, and you can start to build out your pipeline,"Shah said. "We generally build out somewhere between 200 to 300-MW peryear at 15% to 20% returns … so you can see it gives you this great feature tohave that in the event that M&A starts to become too expensive, we canarbitrage our capabilities."

Ofthat development pipeline, Brookfield says 1,250 MW is in advanced stagedevelopment, located primarily in Europe and North America, with the lion'sshare of that being new hydro.

Witha growth strategy premised on providing capital to "where it is scarce,"the company could become one of the largest players in underwriting developmentstage projects, particularly as more fossil-oriented private equity investorsbecome more averse todevelopment risk exposure.

Contracted vs. merchant

Whilecontracted assets will remain favorable to Brookfield, the company may look toshorten the duration of those contracts and open its merchant exposure.

Buyingat the so-called bottom of the cycle, Brookfield says it has not had to hedgeas much, given that power prices have generally been depressed along what ithas seen as four separate power price cycles.

Butthe company appeared fairly bullish on natural gas prices in the Northeastgiven midstream capacity constraints in the region, along with distressednuclear capacity, and indicated that an upwards trend in merchant power pricescould have a sizeable impact on its bottom line.

"Whatyou have is basically too much gas coming out of the Marcellus, and then thatgas is trying to find a home," Brookfield Renewable Partners Senior VicePresident for Market Research Stephane Landry noted. "The short answer isyes, it is going to help prices in the Northeast."

"Ifprices just go up $10 in a $40 power market, that's $25 million to our bottomline," Shah suggested.