Brookfield Renewable Partners L.P. (BEP) Q3 2016 Earnings Report, Transcript and Summary

Thank you for standing by. This is The Chorus Call conference operator. Welcome to the Brookfield Renewable Partners LP 2016 Third Quarter Conference Call and Webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions [Operator Instructions]. At this time, I’d like to turn the conference over to Sachin Shah, Chief Executive Officer. Please go ahead, Mr. Shah.

Thank you, operator. Good morning, everyone, and thank you for joining us this morning for our third quarter conference call. Before we begin, I’d like to remind you that a copy of our news release, investor supplement, and letter to shareholders can be found on our website. I 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. For more information, you’re encouraged to review our regulatory filings available on EDGAR, SEDAR, and on our website. The business continues to perform well. As we approach the end of 2016, we remain on track to achieve our objectives that we set out at the start of the year. In the first nine months of this year, we have invested approximately $1 billion of equity alongside our institutional partners to acquire over 3,000 megawatts of renewables in North and South America. We have also acquired, with our partners, a 35% interest in the public float of TerraForm Power, a publicly-listed company with a 3,000-megawatt portfolio of high-quality solar and wind assets. Finally, we have deployed $120 million this year to build out 200 megawatts of our late-stage development projects that will deliver premium returns over time. During this year, we’ve seen renewable assets across our core markets transact at premium valuations. In this environment, we remain disciplined with our acquisitions in order to continue to deliver total returns to our shareholders of 12% to 15% annually. To do this, we have focused on investments where our operating expertise and countercyclical approach enable us to secure growth at attractive returns. Moreover, we continue to identify a range of new investment opportunities with the potential for significant cash flow growth over the long term. The investment environment remains attractive across all of our targeted markets. In North America, we are looking at opportunities to acquire hydro, wind, and solar across multiple markets. All of these potential opportunities reflect themes that we have discussed in the past; a prolonged period of low energy prices across most North American power markets and balance sheet distress leading to companies in need of both strong financial sponsorship and operational expertise to optimize cash flows. As I mentioned earlier, we have a significant investment in TerraForm Power. We believe that we are best-suited to provide TerraForm with strong operational and financial sponsorship given our global presence, internalized operating and development capabilities, and power marketing expertise, as well as our balance sheet strength and liquidity position. We look forward to agreeing on a path forward with the company shortly. Renewable and clean energy policies continue to gather momentum, with individual states and companies primarily driving the agenda. New England’s recent Tri-State clean energy RFP, Massachusetts’ clean energy legislation, and New York’s clean energy standard program which calls for 50% of generation to come from clean sources by 2030, are examples of large-scale procurement activity in the Northeastern United States this past year. Numerous other initiatives to address climate change are also winding their way through the legislative and policymaking process in various jurisdictions and we believe that many of these will be implemented in due course. And while most of the activity around renewable policies has so far been at the state level, the upcoming U.S. presidential election will, in part, determine the extent of federal support for incentives and policies like the Clean Power Plan or something similar to Canada’s recently-announced federal carbon price. Needless to say, our business is not built around any specific short-run political cycle and we believe the positive trends we are seeing will continue to advance regardless of the outcome. To that point, there are now 60% of Fortune 100 companies with renewable electricity or climate change policies implemented and 81 companies globally who have committed to 100% renewable electricity use. In Europe, we continue to focus on building out our development pipeline to achieve our targeted returns. In Ireland, we recently commissioned a 14-megawatt wind farm and we continue to advance two other projects totaling over 40 megawatts. We also acquired a 19-megawatt build-ready project close to one of our existing wind farms and expect to begin construction by year-end for completion in early 2018. These projects are expected to deliver mid-teens returns in a market where contracted assets and portfolios attract considerable bids at strong valuations. We, therefore, continue to explore the opportunistic sale of some of our fully-contracted operating wind farms in order to surface value and recycle capital into higher-yielding initiatives. In Brazil, we continue to build out three small hydroelectric facilities totaling approximately 70 megawatts of installed capacity, fully contracted for over 30 years. These facilities are expected to generate returns in the 20% range over the life of the assets, with the first of these three facilities expected to be commissioned in the first quarter of 2017. Finally, in Colombia, we increased our ownership interest in the 3,000-megawatt Isagen hydroelectric portfolio to 99.6%. Our net share in this portfolio is approximately 25% and this business continues to perform in-line with our expectations and has strong long-term growth prospects in an undersupplied market. In addition to the operating plants, we are starting to advance 100 megawatts of development in this market as we execute our business plan and look for add-on growth opportunities. I’ll now turn the call over to Nick to discuss our financial results and operational initiatives. Nick?

Thank you, Sachin. Adjusted EBITDA and funds from operations were $332 million and $73 million respectively in the third quarter. We continued to experience improved hydrology in Brazil and strong wind conditions at our European and South American wind farms. In contrast, inflows in North America were lower than average reflecting the drier than normal summer in most regions. Hydrology in Colombia was below long-term average, but in-line with our underwriting expectations for the quarter. The third quarter is seasonally our lowest from a generation perspective and, as in prior years, we take advantage of lower inflows and our storage capabilities to perform a majority of our sustaining capital and asset-optimization work. All projects are proceeding on scope, schedule, and budget. In North America, power markets continue to show signs of dysfunction as the cost of large-scale emissions reductions, especially in regions with low access to renewables, continues to exceed the wholesale market signal or spot prices. In New England, for example, we are seeing clear signs of a market that appears to be dysfunctional. The recent clean energy RFP in New England failed to get close to its 5-terawatt hour per year target by selecting less than 1 terawatt hour of projects despite incentives. This is also a region where, despite winter pricing that’s still in the region of $75 a megawatt hour, nuclear facilities are facing closure due to a lack of revenue. The situation is unsustainable and is also reflected in the continued strength of capacity prices, which we have seen rise in the last few years in response to depressed wholesale prices. All of this points to higher power prices in the future to incentivize the new supply that is required. In Brazil, we are beginning to see signs of economic improvement, which is leading to an increase in both power demand and wholesale market prices compared to earlier in the year. Current spot power prices have rebounded to roughly BRL150 a megawatt hour from recent lows around BRL50 a megawatt hour, while reservoirs are now approximately 40% of the long-term average heading into the rainy season. Commercial and industrial customers continue to work with us in contracting opportunities and during the third quarter we successfully secured three- to four-year contracts at an average price of BRL230 a megawatt hour. In Europe, our build-out of a marketing group is progressing well with revenues of €2.5 million generated in 2016. This is being achieved by selling power over the Ireland-UK interconnector, allowing us to capture higher prices at times of peak demand in the UK. A significant portion of value has been surfaced through optimizing revenue contracts and through the sale of green credits into higher-value markets. Further work is underway to develop these activities across other European jurisdictions. Our liquidity position at quarter-end remains strong at $1.3 billion. We completed a number of financing initiatives in the third quarter including the issuance of a 10-year CAD500 million medium-term note issuance at a coupon of 3.6%. In addition, we raised COP300 billion, or approximately $100 million, of bonds at Isagen at a lower rate than our underwriting assumption. The proceeds will enable us to repay maturing borrowings while surfacing additional funds for future growth. In the months ahead, we will look advance our growth plans by progressing on our transaction pipeline, building out our hydro and wind development projects, and pursuing capital recycling activities on an opportunistic basis. That concludes our formal remarks. And thank you for joining us this morning and we’d be pleased to take your questions at this time. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question today is from Nelson Ng with RBC Capital Markets. Please go ahead.

Great, thanks. I had a clarification on the TerraForm process. I think during the September investor day I think Sachin mentioned that you guys didn’t sign the NDA because the terms are too restrictive since you guys were a large shareholder. I was just wondering whether anything has changed since then and whether you’re formally participating in the process or not.

Hi, Nelson. It’s Sachin. I’d say we continue to be on the outside although we maintain a constructive dialogue. We are the largest shareholder, from a Class A shareholder perspective, with the company so we’re constructive. We maintain a dialogue. But we’re not in the formal process and I think that’s just a function of, given our shareholding, we want to maintain flexibility and our considerations are unique relative to others who might want to bid. That being said, we like the company. We like the assets. We’re going to be a shareholder a very long time. And we think that we can work constructively with the company, its board, and the bankruptcy estate to come to a resolution in the near term.

Okay, thanks. And then, just switching over to Isagen. I believe the MD&A indicates that the Isagen-level debt has a weighted-average cost of about 11.4%. I think, Nick, you mentioned that you raised, recently raised about $100 million at the Isagen level. Is that consistent with the weighted-average debt? Like could you talk about the cost? And also, given the relatively high cost in Colombia, like what’s your, I guess, longer-term financing plans at the asset level and whether it will remain, I guess, under-levered or like what’s your plan going forward?

Sure, Nelson. Yes, it’s Nick. I can take that and, Sachin, you can add anything if you want. That is the right current weighted-average debt in the portfolio. I’d remind you that most of the debt in Colombia is floating-rate debt. And so, they’re in a reasonably high interest rate environment right now. So, it’s a low spread. And, as we see the economy improving over time, we do expect that interest rate to normalize along with the lowering interest rate. The debt that we refinanced recently would have been done at a discount to that. We locked in at about 8.5%. We did a fixed-rate note for seven years, which is a developing market in Colombia where we did manage to outperform the current average weighted debt with the recent issuance. I think we’ve outlined in our objectives for the portfolio that it is very conservatively-levered in our mind and there is opportunity over time to rebalance that leverage with a half to another turn of leverage potential. And that would be done over time, as we see that interest rate normalize.

Nelson, the only other thing I’d add to that is that is one of the opportunities we saw in this portfolio; is that, as a domestic entity really constrained to the domestic bond market, they had a cost of capital that we think we can actually improve. So, a couple of things we’ve done, as Nick pointed out. We’re now able to issue, with our sponsorship, we’re able to issue debt domestically at an 8.5% coupon fixed. So, that’s obviously a tremendous uplift for the company. It just brings, one, more capital to the company and at a better rate. Two is that they were limited to about 2-times debt to EBITDA historically. We think, with our global banking relationships, with our access to capital in external markets, we can take that 2-times and get to 3.5-times, maybe even 4-times long term, which is still investment-grade, but it’s just a whole new source of capital the company really never had. So, we have been able to that currently through hold co leverage that we have in place and that hold co leverage immediately took them from 2-times to about just over 3-times. But we see further room for improvement. So, I think what you’ll see over the next five years is their cost of capital will come down. Their spreads will come down. And their access to capital will grow significantly. And we’ve already made tremendous inroads into that.

Okay. Thanks, Sachin. And then, just a quick question on your capital recycling initiatives. I think you’ve previously mentioned that you’re looking at potentially divesting the Canadian wind portfolio and also some European wind assets. Is there anything else you can say and are there any updates on timing?

Yes, look, I think we’ve been pretty clear from the beginning that we have a strong balance sheet. We have a great liquidity position. We don’t need to raise capital. But we see an environment where multiples for the assets that we own, whether that’s wind or hydro or solar, are trading at high valuations. And so, in that environment, we are looking at some pieces of our portfolio and contemplating selling them. And we are in the midst of various processes around that. I’m not going to comment on specific processes. But if we can surface value for our shareholders, lock in really exceptional returns, well above the target that strive for over the long term, then we should do that. And the two areas that we’ve identified, to date, have been some wind farms in Canada and certain of our wind farms that we’ve completed and are now operating in Ireland.

Okay, thanks. Just one last kind of housekeeping question. In terms of the 127 megawatts of hydro and biomass under development in Brazil, what’s Brookfield Renewables’ ownership interest in those projects? And then, I presume you have a 40% interest in the 43 megawatts that’s under development in Ireland?

Yes. So, Ireland, you’re correct. On Brazil, the simplest way to think about it is 30 megawatts of that development is 100% ours. It’s part of our historical development pipeline. The balance is all 40% ownership. It’s through a fund investment.

Okay, thanks. Those are all my questions for now.

Okay. No problem.

The next question is from David Noseworthy with Macquarie. Please go ahead.

Thank you. Good morning.

Good morning, David.

I was just wondering if you could comment briefly about the hydro assets that ArcLight bought from TransCanada. And these assets look a lot like other assets you have in the area. The valuation, from what I can tell, looks similar to what you’ve paid in the past for, say, Talen Energy’s assets. What is it about these assets that prevented you from the top bidder?

Hi, David. It’s Sachin. So, first, look, I’m not going to comment on ArcLight specifically. But these are very good assets. They are assets we would otherwise be interested in owning. And it simply came down to valuation. And, obviously, the surface-level analysis is what it is, but when you’re in it and you have assets like this and you know the business and you understand the various revenue streams, the various generation issues around shaping, around optimizing portfolio, we obviously had a different view. And would we have liked to have owned these at the right value? Absolutely. Do I think ArcLight will have a great investment and make a great return? Absolutely. We just weren’t successful on this initiative.

Okay. And just with regards to your comment about the dysfunction of the New England market, can you comment on what you think will trigger some more rational behavior?

Sure. You mean in terms of the divergence of views between buyers and sellers?

Well, I was thinking –

Sorry, go ahead.

I was also thinking along the lines of prices that are getting bid in relative to the cost of new capacity.

Right. So, look, I think we’ve just been in an environment where you’ve got sort of two really important factors that have been at play. One is that underlying fuel costs for, largely gas plants, has been very, very low. And so, it’s made gas highly competitive, to the point where it can economically displace coal. That’s sort of factor number one. And that’s really a function of the advances in fracking technology. And then, factor number two is, from an investor perspective, we have just been in this protracted low-return, low-rate environment for eight years now, where long bonds are, in the U.S., are at 2% or zero in Europe. And, in that environment, we’ve seen consistently, year over year, returns trending down on new investment. And so, what we’re seeing is just an environment where people are willing to earn less in spite of taking the same risks. And that’s not an environment, generally, that we at Brookfield have a competitive advantage. We have a 12% to 15% return threshold. We generally like to look for situations where we can surface value through operations. And we are a long-term owner and operator. So, when it comes to just people bidding, whether it’s on development or operating assets at lower returns, we can’t compete. But what we can do, and what you’ve seen us do in terms of capital deployment over the last five years, is look for unique situations where we can bring all of that expertise that we have in-house and use that to drive to our long-term return targets. And I think until you start to see risk being priced in properly or some structural changes on the fuel side, we’ll probably be in this for a few more years. And that’s okay because we have been able to continue to grow the business in that environment. It just means that we have to do it a different way.

Okay. And maybe just one last question on Ireland. I see that you’re able to acquire assets in the Irish market for returns that you like. Can you just talk quickly about some of the characteristics of the 19-megawatt wind farm that you bought versus your comments that you’re looking to recycle and you’re seeing great returns? Like perhaps the spread between construction, ready for construction assets versus operating? And the assets that you bought, are they contracted?

Yes, they are. And I’d say where we’re successful in buying in a market like Ireland, and I would apply this to all markets, one of the great advantages we have as a scaled business is what we have historically referred to as tuck-in acquisitions. And what that means is, given our platform, our operating people, and our ability to manage assets without adding people or infrastructure, we can often buy something even in a market where valuations are frothy, but really not – but have a competitive advantage around the cost structure of those facilities. So, the 19 megawatts would reflect that. It’s adjacent to one of our wind farms in Ireland. We could effectively just buy it with no people, no infrastructure, from an independent owner who needed capital quickly. And so, I’d say those situations are unique. They are rare. But when they happen, we have made a living off of doing that in North America, in Brazil. And now, we’re seeing the benefit of our scaled portfolio in Ireland. And so, I wouldn’t suggest that that’s just a normal-course transaction that was run through sort of some broad auction. This is something that was unique and just happened to be – it had the tuck-in value for us that few others could compete with.

Thanks for the color. I’ll get back in the queue.

Thanks, David.

The next question is from Ben Pham with BMO Capital Markets. Please go ahead.

Okay, thanks. A couple questions on the quarter. On Colombia, can you comment on pricing in the quarter? Is there a bit of seasonality also in pricing in Colombia?

There is seasonality. It’s a hydro-dominated market. So, early in the year, when we saw water levels very low in the country, we saw prices spike tremendously. And, since then, I’d say really mid- second quarter coming into the third, the rain has started again. Reservoirs are replenishing. Prices have come back down. And that’s pretty normal course. I think the bigger takeaway for us is just – we went in with this thesis that the market was short power, distressed. And I think even to our surprise the volatility in the market is higher than we probably would have expected. And that’s good. It just means that the value of what we bought and the ability to optimize what we bought, at least in early days, is very high. And this is a really tight market. And if you are on the supply side in any business and you’re in a tight market that’s generally a good thing. And that’s what we see in Colombia. And I think what that means is the development pipeline will be very valuable. Our reservoirs will be very valuable. Our ability to set the commercial strategy and optimize revenue will be very valuable. And it’s going to be a great growth market long term.

Okay. And just to stick on Q3 in particular. So, there was hotter conditions [indiscernible] As pricing well above your expectations that you picked up some benefit on contracted portion, the 20% or so?

You’re talking about in Colombia specifically, Ben?

Yes. It seems like an implied pricing is above your implied contract, the prices in Colombia.

Yes. I would say there was marginal pickup in price. The other thing we had in the quarter, Ben, was just an FX implication. So, converting back to U.S. dollar, we saw some strength in the COP, quarter over quarter. So, a large driver of that will be FX.

Okay. Okay, got that. And what are your thoughts about Colombia, the river systems, six in particular? Can you clarify, are those systems connected? Or do you feel like having six systems just help set up there’s ample diversification in the country for you guys?

Yes. Look, it is one country so I don’t want to overstate the diversity. But is six systems and the assets are spread out throughout the country. So, there is diversity. I don’t want to overstate it because it is one country. But, that being said, I think the real benefit we have is our storage capability. We can store power for 14 months. We have a gas plant where we have access to firm gas supply and firm transmission. And so, where volatility will exist through weather patterns, one of the value drivers that we saw in this was the ability to store and actually capture higher prices. And I think that’s the offset to an investment in one country.

Okay. And my last question. There’s a couple of comments on capital recycling. And I’m just wondering; on the U.S. hydro merchant business, just keying off the other question, is there a point where you guys would look to sell that or pieces of that merchant portfolio? Just you know how we had some pretty high multiples in your investor day and then there’s some recent transactions that look pretty conducive. I mean could you create some value that way and possibly even benefit your multiple with reducing the merchant component?

Yes, look, it’s an interesting question. I think we’re value investors and we’re not wedded to any particular asset. I think the answer is, yes, we would always consider selling our hydro assets, a partial interest in our hydro assets, bringing a partner in. It would obviously be dependent on valuation. I’d say in the current environment where prices are very low, it would be tougher for us to wrap our mind around giving up back-end value. But, I look at it like we’ve put $3 billion to work in merchant hydro in the last four or five years and what we’re seeing now is valuations keep trending higher and nothing has fundamentally changed in the price environment. I think we bought well. I think what we’ve bought in the last four or five years, if you take the current valuations, we’ve done tremendously well. And I think the prospects for revenue growth out of those plants continues to be very good in light of the distress we’re seeing in the wholesale markets. And combining that with higher multiples means there’s lots of potential value growth in this business.

Okay. So it seems like today’s conditions, there’s high multiples, but it’s on historically trough EBITDA cash flow number and you think that there’s a lot more value for you guys to retain that from, when you do the math, on a longer-term perspective.

Yes, absolutely.

Okay, great. Thanks a lot.

Thanks, Ben.

The next question is from Rupert Merer with National Bank Financial. Please go ahead.

Thanks. Sorry about that. It was on mute. Looking at the TerraForm Power auction again, have you had any changes to your thinking on potential structures for Brookfield’s involvement in TerraForm? Would you consider acting as a sponsor for TerraForm as a yield co? Or you only contemplate purchase of those assets into Brookfield Renewable?

Hi, Rupert. It’s Sachin. We’re flexible as an organization. I think that’s actually one of our strengths at Brookfield, is that we’re flexible. We listen to what investors, stakeholders, shareholders want. And we’ve got a history of being able to provide tailored solutions to counterparties. And this situation is no different. And so, I think we’re open to all of the above.

Okay, very good. There has been some news tying Brookfield to a Continuum Wind portfolio in India that could be up for sale. Can you give any more thoughts on investing in India, the relative attractiveness of that market, returns, or legislation, growth potential?

Sure. I won’t speak to the specific company there just because we don’t do that with any company. But we like India as a market. It’s a great market from a power perspective. Obviously, everyone knows it’s got a very, very large, broad infrastructure deficit. It’s been constrained of capital for decades. It’s deeply undersupplied in almost every sector that Brookfield is strong at, the broader Brookfield. And I’d say power is no different. There’s 1.5 billion people that are being served by almost 200 gigawatts of power. And then, if I add on to that the fact that they have a very large coal supply component to their supply stack, which will need to get addressed. As the country continues to grow its GDP and get wealthier, people will demand a better standard of living. It has natural untapped hydro resources both in the north of the country and in the south of the country. It has a strong history of hydro development, which we think, again, we can tap into. It’s got government support for wind and solar, which play to our strengths as well. So, there’s a lot of development work you can do there, M&A work you can do there, and you’re in a market that’s undersupplied, which gives you a lot of wind at your back. So, for us, it’s a country that we like, we want to invest in. And we might even look back in 15 years on a call like this and it might look like Brazil to all of our investors, where we’ve just been slowly building out, adding projects here and there, and have a nice platform there that allows us to grow at what I’d call high-teens to low-20% returns.

You’ve talked about lower returns in the market and the low-rate environment and we’ve seen increased competition in developed economies. Are you seeing that competition spilling over into markets like India and Brazil increasingly or still seeing much higher returns in those markets?

No, I think capital flows now across the globe in various cycles and what we’ve generally tried to maintain discipline on is focusing on areas where capital is scarce. And so, if I take – anybody who has followed our power business over the last five or seven years from 2011 or 2010 call it, to 2014 we did nothing in Brazil. We did one small 30-megawatt project and that was it. Not that we weren’t trying, but there was a lot of capital in that country chasing transactions. Returns were low. And, all of a sudden, in 2015 we did two transactions. We started to build out five development projects. And we secured excellent contracts for our portfolio. And we did that all because there was a gap in the capital in the country. We had a competitive advantage with our platform. The currency had devalued. And we think we’ll make excellent returns on that. India is the same way. There will be times in India where you should invest. Now is one of those. And there will be times where a lot of capital flows in and we’ll take a pause. And when you’re building a business, taking a pause is okay as long as you have good assets and a strong balance sheet.

Great. That’s all my questions. Thank you.

The next question is from Jeremy Rosenfield with Industrial Alliance Securities. Please go ahead.

Thanks. Good morning, guys. Just a couple of short questions. Just in terms of the Irish wind opportunities, the mid-teen returns I think you mentioned off the top, Sachin, you were referring to, I think equity returns there. And should we assume sort of project-level financing would be the way that you’re going to go with those assets?

Yes. Hi, Jeremy. Yes, we finance at the project level in Europe and in Ireland in particular; non-recourse, similar covenant pattern to what we do in North America. So, we’re quite happy with that and Nick can obviously elaborate on that offline if you want to. In terms of returns, we would have what we target as kind of build and hold to maturity returns in euros of mid-teens, which is quite attractive relative to where assets trade in that market. If we obviously did that and then sold, the returns at values that people acquire assets today, generally high-single digits, then the returns get far more attractive. You start to get into the mid-20s% in terms of your crystalized returns. So, it is an advantage for us to have a great development pipeline and that’s why we keep building in that market.

Okay. That makes sense. Then just another little cleanup. On the settlement payment that you received in the quarter, I think you’re referring to the OEFC settlement or the OEFC payment. Can you give a breakdown in terms of where you’ve recorded that in the segments? I think maybe partially in the hydro segment, partially in the corporate.

Yes, that’s right, Jeremy. There’s about $3 million to $4 million would have been associated with the Canadian hydro asset and the balance would have been other related to one of our gas plants, our LSP gas plant, which has since been sort of decommissioned, but that would be in the other assets segment.

Right. Okay, perfect. And then, just, I think more broadly, Sachin, if you – not to take away, obviously, from your focus on hydroelectric power and hydro assets. But you think about the dysfunction in the U.S. Northeast market and you think about where different types of assets are trading in terms of valuation, do you think at all about becoming more opportunistic and adding fuel diversity in the U.S. Northeast, maybe looking at some Co-gen assets or some assets that are really undervalued that could be in the line for strong capacity payments and becoming more opportunistic just on that side of things?

Yes, it’s a good question, Jeremy. Look, we debate gas and Co-gen facilities all the time internally. We keep an eye on who’s building. We’ve seen a lot being built in PJM in particular, close to Marcellus. We’ve seen private equity funds move into that space. So, we obviously pay attention. We see the near-term returns there. I’d say we still – we’re still not there institutionally, on the longer-term returns. I think the part that nags away at us is just whether this heat rate arbitrage between market-implied heat rates versus near-term heat rates on gas plants will last and whether or not the capacity payment is something that you can, a single-year capacity payment is something that you can make a 30-year capital bet on. And so, we might be wrong and we may have missed an opportunity in not doing that. But I think, for us, we generally struggle with putting that level of capital to work on that long-term an asset without, I’d say, better conviction around the value drivers.

Okay. And if you were to, let’s say, think about adding that type of diversification to the overall portfolio, what do you think might be sort of your max comfort level as part of the whole portfolio, like 10% or something like that, just in terms of fuel diversity?

Yes. Look, I mean it wouldn’t be a big piece of the business. I think – we have a couple of gas plants in the portfolio today. We have the ability to dispatch gas facilities. We know how to procure the fuel. But I don’t want to mislead you into thinking this is going to be a big part of the business. And, as I said, to date, we’re still not comfortable that the value drivers exist long term. And the other part I didn’t say is that today most of those folks who are going into it really need to use significant amounts of leverage to drive their returns. And we are an investment-grade issuer. We maintain investment-grade project-level financing and corporate-level financing. It’s likely that it’s not going to be a great segment for us that we think we can build out meaningfully over the long term.

Right. Okay, great. Thanks.

No problem.

The next question is from Andrew Kuske with Credit Suisse. Please go ahead.

Thank you. Good morning. Maybe a point of clarity just on TerraForm, to start. So, you stated that, and I think in the letter, that you’ve got 35% of the equity between yourself and partners. What is BREP’s portion of that? And then, the second question is; do you own any other securities in the capital stack of either TerraForm or SunEdison?

So, BREP’s share, Andrew – it’s Sachin here – BREP’s share is 30% of that. And I’m not going to comment on other securities we own, just in light of where we are with that. In talking to the companies and just in light of where they are, I don’t think it’s prudent to comment on that.

Okay. And then, maybe more just an operational question. When you look at the situation in the Northeast and your portfolio there and just the commentaries that we’ve seen on transmission infrastructure, whether we look at electricity transmission or natural gas transmission, and then real legitimate concerns about what happens in peak weather conditions, whether it’s very hot summers or very cold winters; how do you think about your portfolio positioning in an environment where we could see, say, super spikes in pricing? And how do you think about your portfolio positioning from an optionality standpoint given that you’ve got a lot of hydro reservoirs that sort of sit there with great optionality? And how do you marry that up with your trading business?

Yes, look, it’s been part of our thesis for a long time. Unfortunately, we’ve just been in this kind of malaise for four or five years now. But there will come a point where having a dispatchable bulk carbon-free power facility is very, very valuable. And I think you’re seeing more and more people have that view, with an earlier comment about where transactions are trading today for assets that we have generally been buying at relatively better returns. So, I think the stress that you point out to, Andrew, is real. It’s growing. Volatility is increasing. I think, as long as gas prices are low and the weather has been mild, you’re not seeing that really manifest in terms of large, large spikes, other than what we saw in the polar vortex a couple of years ago in New England where you, all of a sudden, saw how distressed or how strained or constrained the system was. But you have a few more incidents like that and I think this failed RFP that we saw in New England, those things I think people come back to the table to try to figure out how to build added transmission to de-bottleneck constraints and how people start to think about intermittent technologies and the role they play relative to other technologies.

Okay, that’s very helpful. Thank you.

The next question is from Sophie Karp with Guggenheim Partners. Please go ahead.

Hi, good morning. Thank you for taking my question. Can you guys maybe comment a little bit on the process in New York State where you’re involved with a number of other parties in the treatment of hydro facilities here and kind of where do you see this going from where you are right now?

Sure. Hi, Sophie. It’s Sachin. I think what you’re commenting on is just around the desire of New York State to procure carbon-free generation, the incentives they’ve been providing to nuclear facilities and us effectively advocating for ourselves and other hydro owners to say that we’re in the exact same boat, which is today policymakers are picking and choosing between carbon technologies and which ones should receive certain compensation benefits and which ones should not. And I think nuclear owners are feeling that pain. I think, for the first time in probably the history of the supply stack in the U.S. Northeast, we’re seeing nuclear operators facing potential shutdown threat because they can’t cover their marginal cost. And that’s just never happened before. And so, you’re starting to see some subsidies being provided. And I think our only angle in the whole thing is just that the treatment of carbon-free generation should be fair and consistent across all technologies. And if you provide carbon-free power and you are important to renewable power standards, to ensuring that we continue to clean up carbon emission in the environment, then there just needs to be a level playing field. And that’s why we’re involved in that. And we’re also – we advocate in all markets we’re in for hydro being treated as something that’s additive to states trying to reach their renewable power standards. It’s important, from a sustainability perspective, that we don’t just keep building new things, but we preserve those carbon-free technologies that exist and can exist for many, many decades to come. And so, that’s just part of our advocacy effort.

Thank you.

The next question is from Frederic Bastien with Raymond James. Please go ahead.

Morning, guys.

Good morning, Frederic.

So, you’ve had your hands on Isagen for a number of months now. Have there been any major surprises, good or bad, that you’ve come across since acquiring the assets?

Yes, look, nothing major yet. I think we said a couple of quarters ago we’re really pleased with the management team. They’re excellent operators. We sleep well at night knowing they’re looking after the assets. I mean they do a really, really tremendous job on operations and maintenance CapEx, managing stakeholder issues, running the plants properly. And, to their credit, they’ve really shown us their commercial capabilities as well; looking to optimize revenues, looking to manage the CapEx profile with water levels were low. So, we’re really happy with the management team. The assets are extremely high-quality. We knew that going in. We’d seen all the assets. We had done a lot of work on this so this wasn’t an investment where we had little time to do diligence. We were looking at this for over two years. So, no material surprises. The only one I would say is, maybe a surprise to the positive, which I alluded to in an earlier question, is that the system is tight like we thought, but it could be tighter than we thought. And, if it is, then this 4,000-megawatt development pipeline that came along with it, we may be building more than we anticipated. And that’s great, if we can.

So, maybe another way to say this is that – are you uncovering potential organic growth opportunities that might have not been apparent at the time of the transaction or –? Just building on your comment here.

Yes. Yes, absolutely. Like we put zero value on that pipeline. We didn’t get a chance to see it too much in diligence. It was not something that they provided a lot of information on. They provided a lot on the base business, but not on the development pipeline. And so, we had no way of valuing it. And, for us, it was just a bit of an option that was out there, but one we weren’t sure what to make of. And I think, in light of the supply-side issues, the volatility in pricing, and the quality of the projects they have, we’re excited that we can build out a portion of that. And that will all be additive to returns, which were already high-teens. And we think if we build out even a modest amount of development, this could be in the low-20% return range.

Great. Thanks, Sachin.

The next question is a follow-up from David Noseworthy with Macquarie. Please go ahead.

Thank you. Just on the operation – and we saw Colombia generation relative to LTA was quite low. I was just wondering is that because you made it clear there was a conscious operational decision in there? Or I was under the impression because you had 14 months storage that we’d see more stability in the generation from those particular assets despite the fact that they are hydro.

Yes. So, where you’ll see the stability is actually in the earnings rather than the generation, I’d say. So, first and foremost, when we underwrote the portfolio, just to put it out there, the first year, the 2016 year numbers were given to us by management and we are exceeding those numbers. So, we’re well ahead of our underwriting and exceeding them probably in the range of 10% to 15%. The reason that’s the case is the budget that was set in our first year of underwriting was really underwritten to a low-hydrology year. Given the seasonality of that country, you know by the end of the year where the reservoirs in the country sit and you know what the outlook for the following year will be in terms of generation. What we’re seeing as the offset to low generation is that we are capturing higher prices and we’re able to optimize the reservoirs. So, although the generation line is somewhat offset by reservoirs, it’s never going to be a complete offset. But what you can get is that your revenues can actually get you back onside where you get a very stable revenue and EBITDA profile in spite of volatile generation. And that’s what we would expect to see longer term out of that portfolio.

All right, perfect. Thank you very much.

The next question is from Sean Steuart with TD Securities. Please go ahead.

Thanks. Good morning, guys. A lot of my questions have been asked. I just wanted to follow up on the development pipeline in Colombia. Can you give us a little extra detail on the 100 megawatts of development you’ve started to advance there?

Sure. So, it’s largely one project. It’s a just over a 90-megawatt project. There’s another small project that we’re advancing. Both are still in the permitting stage, but I’d say very late-stage permitting in the sense that there is, I’d say, one or two final permits that are needed before we can actually move to looking to find contracts, looking to hire or engage with an EPC contractor and actually moving to commercialization. They’re small. So, 90, call it, megawatts of hydro in the country. It’s a decent-sized project, but relative to some of the other projects we own, they are small. And based on our assessment of build costs, our assessment of this stage of permitting and what EPC construction costs in the country, we think that we can build these in a low-price environment at a low-20% nominal return. So, our thinking on it is; for a business that we bought at high-teens returns, we will only do development if it’s accretive to the portfolio. And, in the current price environment, these projects, given the head of the rivers, given the inflow data that we have, given the topography, and sort of the costs of civil, mechanical, and electrical engineering around it, they should be good projects. They should deliver low-20% returns and be immediately accretive to the business.

Great, thanks for the detail, Sachin. And that’s all I had.

No problem. Sure.

This concludes the question-and-answer session. I will now hand the call back over to Mr. Shah for closing comments.

Okay. Well, once again, thank you all for your continued support an interest in the Company. We look forward to reporting on our progress, now, at year end for both the fourth quarter and the full year. Thank you. Goodbye.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.