Brookfield Renewable Partners L.P. (BEP) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Brookfield Renewable Partners Second Quarter 2019 Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.I would now like to introduce your host for today’s conference, Mr. Sachin Shah, Chief Executive Officer of Brookfield Renewable Partners. Sir, you may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us for our second quarter 2019 conference call.Before we begin, I’d like to remind you that a copy of our news release, investor supplement and letter to unitholders 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 SEDAR, EDGAR and on our website.Our business performed well in the second quarter of 2019, supported by strong performance at our operating businesses and contributions from recent acquisitions. We advanced our strategic priorities during the quarter, deploying capital in a number of transactions, while maintaining a robust balance sheet and access to capital. Of note, we generated FFO per unit of $0.74 a share, a 35% increase over the prior year.We announced our investment in a joint venture of a global solar developer, with over 6,500 megawatts of utility-scale PV solar for approximately $500 million, or $125 million net to BEP, which we expect to close in the fourth quarter. We closed the acquisition of 210 megawatts of operating wind in India and the first C$350 million tranche of our C$750 million investment into an Alberta renewables portfolio.We announced the acquisition of a 322 megawatt distributed generation portfolio in the U.S. through TerraForm Power, nearly doubling our DG footprint and providing significant opportunities to drive incremental cash flow growth through operational and commercial synergies. And we ended the quarter with over $2.5 billion of available liquidity, raised approximately $275 million in incremental liquidity with the closing of the sale of certain of our South African facilities, as well as strategic up-financings and other liquidity initiatives.Finally, we reduced our FFO payout ratio on an annualized basis to approximately 85%.Our 50-50 joint venture with KKR to own one of the largest solar developers globally, with an experienced management team, best-in-class contracting capabilities and a proven track record of developing assets at premium returns. The portfolio comprises approximately 275 megawatts of operating solar, 1,400 megawatts solar under construction and a broader 4,800 megawatt development pipeline, which should provide significant growth optionality over the long-term.Over the next five years, the plan for the business is to develop 500 to 800 megawatts of new solar capacity annually in the existing pipeline and to look for additional development opportunities in the global solar market. This growth will complement our existing pipeline of development projects that today include over 600 megawatts of advanced stage wind, hydro and solar, and approximately 130 megawatts of assets under construction. We expect to close the investment in the fourth quarter of 2019.Additionally, subsequent to quarter-end, we announced through TerraForm Power that we entered into an agreement to acquire, for approximately $720 million, a scale distributed generation business in the U.S. totaling 320 megawatts of recently constructed, fully contracted capacity, underpinned by 17-year average remaining PPA term with credit-worthy offtakers.This investment will nearly double our DG footprint, making us one of the largest such portfolios in the U.S., and providing significant opportunities to drive incremental cash flow growth through operational and commercial synergies. The investment is immediately accretive and requires no incremental capital as we expect to fund the transaction in TerraForm through project-level financings and asset sales.This transaction extends TerraForm’s contract profile, reduces its portfolio resource variability and improves its organic cash flow growth. We expect the transaction to close in the third quarter of 2019.Finally, we continue to execute on our capital recycling program during the quarter, completing the sale of four of the six projects in our South African portfolio for proceeds of $108 million, or $33 million net to BEP. We also advanced the sales of the final two projects in our South African portfolio and other non-core portfolios in Thailand and Malaysia. We expect these asset sales to close in 2019 for total proceeds of approximately $180 million, or $55 million net to BEP.I’ll now turn over the call to Wyatt to discuss our operating and financial conditions.

Thank you, Sachin, and good morning, everyone. During the second quarter, we generated FFO of $230 million, up from $172 million in the prior year, as the business benefited from contributions from recent acquisitions and operational improvements driving cash flow growth. We also continue to benefit from the diversity of our portfolio as strong generation from our North American hydroelectric fleet more than offset a period of relatively weak wind resource.In the second quarter, our hydroelectric segment generated FFO of $226 million. The portfolio saw strong generation in North America at 15% above the long-term average and strong pricing in Colombia. We continued to advance our contracting initiatives across our business, with a focus on commercial and industrial customers.In South America, we remain focused on extending our contract terms, signing 14 PPAs in Colombia and Brazil for a total of over 1,200 gigawatt-hours per year. As a result of these initiatives, in Colombia, approximately 30% of our contracts now have terms greater than five years versus none in 2016 in the acquired business. In North America, we continue to benefit from a 17-year average contract term and no material maturities until 2029.Our wind and solar segments generated a combined $66 million of FFO, up 32% relative to the same period in 2018, as we benefited from acquisitions and contributions from recently commissioned projects, as well as our cost saving initiatives. We also added 25 megawatts to our global rooftop solar portfolio, including commissioning 10 megawatts through our joint venture with GLP in China, and closing the first phase of a 15 megawatt acquisition in U.S. Northeast.Our storage and other operations segment performed well, generating $7 million of FFO during the second quarter, as the growing intermittency of global electricity grids continues to increase the scarcity value of utility-scale renewable storage.We ended the quarter with over $2.5 billion of available liquidity. In addition, we continue to prioritize an investment grade balance sheet, we are rated BBB+ by S&P, which we believe gives us significant financial flexibility and provides investors with a lower overall risk profile. Lastly, we remain focused on terming out our debt at low rates and hedging our cash flows from currency fluctuation when the cost is economically prudent.During the quarter, we extended the term of debt in our Colombian subsidiary to approximately 10 years by issuing 1.1 trillion pesos of bonds in the local market. This was one of the largest financings ever completed in Colombia and, given the high-quality nature of our portfolio, was significantly over subscribed. At TerraForm Power, we progressed up-financings of select assets in the portfolio and used the proceeds to repay credit facilities.Looking ahead, we continue to focus on executing on our key priorities, including maintaining a robust balance sheet and access to diverse sources of capital, enhancing cash flows from our existing business and assessing acquisition opportunities.As always, we remain focused on delivering to our unitholders long-term total returns of 12% to 15% on a per unit basis. We thank you for your continued support and we look forward to updating you on our progress in that regard.That concludes our formal remarks. Thank you for joining us this morning. We’d be pleased to take your questions at this time. Operator?

Thank you. [Operator Instructions] And our first question comes from Sean Steuart with TD Securities. Your line is now open.

Thanks. Good morning, everyone.

Good morning.

A few questions. The 500 to 800 megawatts per year for the X-Elio portfolio that you’re planning on developing, I think, the prospective pipeline is across a wide array of geographies. Can you give us a sense of where the mid-term focus will be in terms of geographies? And then I think you guys typically reference 17% to 20% levered IRRs for greenfield development. Where do these projects sit in that spectrum?

Sure. Hi, Sean, it’s Sachin. I’d start with just geographies. In the near to mid-term, the bulk of their pipeline is in Iberia, the United States and parts of Latin America, I should say. And what I would say – which is why we liked it, because we have a presence in those markets. Obviously, we think it’s just logical to continue to expand broadly further into Latin America and Columbia and Brazil and even Chile long-term. And in the U.S., it’s [Technical Difficulty]. So, that’s how I’d round out sort of the mid-term priorities.From a return perspective, remember, they have operating, under construction and pipeline assets. So you’re absolutely right. On pipeline assets, we target high-teens returns and active U.S. dollars [Technical Difficulty] depending on the regions we’re in. We would translate it [Technical Difficulty].For operating assets and under construction assets, I’d say, we would be targeting somewhere in that low double-digit type of return. So if you look at the bulk of the portfolio in the near-term, it’s really completing the under construction assets, which we would say we could do at low double-digit U.S. dollar returns and in the pipeline, we would expect building out at high-teems return. And then, obviously, a key part of our strategy in the business would be efficiency. And what we mean by that is making sure that [Technical Difficulty] assets, selling down projects, so that we will take out [Technical Difficulty].

Okay. Thanks for that detail. Question for Wyatt. You guys referenced the up-financing activities at TerraForm and in Columbia. Can you give us a sense of line of sight you have on further midterm potential up-financing?

Thanks, Sean. I think that generally the way to think about it is, if you look back to kind of 2013, we’ve done around $1 billion of up-financing kind of business in that five to six-year period. If you look forward over the next five years, we think we have the same amount of debt capacity to raise from an up-financing perspective. And it really is spread out throughout the world [Technical Difficulty], where we definitely have – traditionally, we haven’t relied on the capital part of that region. Lending conditions in that market have gotten a lot better. Rates have come down significantly. Most banks in the country are around 5% to 10% base rate in that country.So that makes borrowing in that country economically prudent. And so given our portfolio, there is largely unlevered, that creates a base fee [Technical Difficulty] on that portfolio. But it really is that kind of $1 billion to look forward over the next five years. It really is spread around the world and it’s all done at an investment rate basis so still [Technical Difficulty].

Okay. Thanks, Wyatt. I will get back in the queue.

Thank you. And our next question comes from Rob Hope with Scotiabank. Your line is now open.

Good morning, everyone. First question is on X-Elio as well. I would say, this is a bit of a step up just given how large of a development pipeline is included here. Does this signify that you’re seeing better opportunities on the development side versus the acquisition side on the solar assets?

Yes. Hi, Rob. Look, I think I – not relative to M&A right now. I think, what we’re seeing on the development side is the last sort of 7 to 10 years on development has really been about capturing and reducing construction costs as panel prices have declined [Technical Difficulty], prices on the wind side of it have declined.So really, investors or developers who were successful in the past were really just betting that overall costs would continue to decline and that decline would then work its way into their returns. Therefore, they were bidding into projects at prices that were lower than you could otherwise build something at that moment in time. But the bet you were making was that build costs would decline by the time you had to actually build the project.I think what we’re seeing now is, we’re at a bit of an inflection point in the industry where costs are largely flat. In some instances, due to tariffs and due to subsidies, overall cost structure is actually increasing on the margins. And therefore, development looking forward, and I’d say for the next decade, takes a different skill set. It takes a strong operational focus, so that you can operate the plants at the highest margins possible and the most efficiently. It takes a strong capital discipline.So, it requires investors who have strong access to capital and who are disciplined about capital recycling or effectively bringing the lowest costs up to their project. And I think, therefore, it plays more to our strength as an investor rather than making that, that costs will decline by the time itself.So I just think the whole industry is at a bit of an inflection point. And I think, therefore, we see the next decade for us being more – development being a more attractive part of our business. Wrapping all that up, though, I would say that, if the last 10 years, we’ve done sort of 10% of our growth in development, I’m not at all suggesting it’s going to be 50%.But I do think that it can go to 20% of our growth coming from development and 80% could be from M&A or 75% to 25%, whatever split you want to describe in that range. And, therefore, just think that investing in portfolios like X-Elio makes a lot of sense for us at this stage.

All right. I appreciate that color. And then switching over to the M&A side, we’ve been seeing your liquidity move up through 2019 so far and we’re seeing some assets for sale in Portugal and Spain. Can you just give us an update on kind of opportunities and the state of the market on the M&A side?

Sure. It’s still highly competitive, as always. There’s lots of capital chasing deals, and I think our playbook hasn’t changed. We tend to look for opportunities, where we can bring our operational occupancy there, where there might be a capital scarcity, where we see follow-on cash flow growth that we can deliver by optimizing the asset base.And I just – I think in a low-rate environment where there is a lot of capital and a lot of investors who like the asset class, we just continue to be aggressive about being different and trying to do different types of transactions. It doesn’t mean we won’t enter into auctions. It doesn’t mean we won’t sometimes win a highly competitive auction. But we have to have an angle that’s unique. And I think the DG portfolio that we acquired through TerraForm is a good example of that. That was an auction.We were obviously the winner. But given the scale of the business we have today, the portfolio we have and our ability to reduce costs, secure new services with those existing customers and to grow that platform, it gave us a competitive advantage to be able to successfully [Technical Difficulty].

All right. Thank you for that. I’ll hop back in the queue.

Thank you. And our next question comes from Nelson Ng with RBC Capital Markets. Your line is now open.

Great, thanks. A quick question on Columbia. So you mentioned that 30% of the contracts have a term greater than five years. Big picture, what’s your, I guess, shorter – short and longer-term target for contract term? And I guess, do you have to balance, like is there a balance in terms of do you have to give up a bid on price to get a longer contract?

Nelson, it’s Sachin. So I would say, look, when we bought the business, virtually every contract I would sign was one to two years in duration and the long-term contract market did not exist [Technical Difficulty]. Our thesis at the time was that particular utilities and discount would actually like certainty of a long-duration contract, because it was useful to the rate base and it allow them to plan their own cost structure over a very long period of time.We thought industrials might like it as well, but we weren’t 100% sure. What we did know, though, is that we had the skill set to bring it to the market and we had a good team there in Columbia to execute on that strategy. Now I’d say now that we’re three years in. We’ve seen that thesis play out. We’ve seen customers really like the certainty of long-term [Technical Difficulty]. It’s helped that hydrology has been really volatile in the country. It’s helped that gas has not been readily available in the country, and it’s helped that GDP continues to grow and power demand continues to grow.So I think all of those things have worked in our favor. The economics, I would say, are not as black and white as you’re suggesting. We signed many contracts two years ago when there was a shortage of water at significant premiums to the current market price, because annually, people were nervous about availability of water and demand growth and, therefore, were just looking for certainty.I’d say, but overall, as a trend, we value duration more than we value short-term profits, because with duration you can match fund the asset, you can get a lower cost of capital, and you can drive a higher return to shareholders. And, therefore, we will always forego a little bit of income on the front-end if we can drive more capital efficiency and a better return, and you should just think of it that way out in the second quarter.

Okay. So just to clarify. So over time, you would expect that 30% of contracts greater than a five-year term to just gradually increase. But there’s no kind of sweet spot in terms of where you want that 30% to be?

Yes. Look, we are not proposing that we would increase it beyond 70% and there are reasons for that in terms of just our own management and reservoirs and having some optionality available to deliver highly valued storable power in a scarce market. So I think, you should expect us not to go beyond 70%. But from that 30% we’re at today, we would comfortably move that up to 50%.

Okay. Got it. And then while we’re still in South America, a quick question on Brazil. You had three pretty good quarters in a row of, I think, slightly above average generation. Could you just comment on the reservoir levels? I presume they’re still below average, but have been improving. But can you just give a bit more color there?

Yes. Your observations are absolutely correct. Reservoir levels are still below long-term average [Technical Difficulty], but they’re improving. Power demand has been largely flat, which has allowed the recovery to occur faster than if the economy was running full tilt. And I’d say, we’re just seeing, as a result of those factors, seeing our overall generations continue to be at or above [Technical Difficulty].

Okay, thanks. I’ll get back in the queue.

Thank you. And our next question comes from Rupert Merer with National Bank Financial. Your line is now open.

Good morning.

Good morning.

Looking at the M&A landscape and your strategy on M&A, are you looking at any assets that are outside of renewable energy today?

Not in any direct way. I’d say, we are always paying attention to new technologies in by far the decarbonization space. And we’re always looking at ways we can help companies solve for decarbonization of their existing infrastructure of the business. But at the end of the day, from a bulk investment perspective, today, we continue to be focused on generation.

Great, thanks. And then moving over to the wind results in the quarter, you had some softness in North American wind. And you mentioned that some of the softness was from maintenance outages in the U.S. Can you talk about the results in the quarter? How much of the weakness was from a low resource and how much was from outages that you referenced in the U.S.? And how much of that came from curtailments? And I think we typically are seeing curtailments in Canada these days.

Yes. Thanks, Rupert. It’s Wyatt here. So on the maintenance point, I think the reference here is towards our TerraForm portfolio, where, as you likely know, they’re transitioning to an O&M contract with DE. There were certain upgrades [Technical Difficulty] efforts. And so that was really isolated this quarter, putting that portfolio in place [Technical Difficulty] O&M contract going forward and the significant cost savings that it provides and, as well production guarantees are being guaranteed by that contract as well.In terms of overall wind resource, I would say, you’ve seen this across the sector. Generally, North American wind was down. But really that really shows why we’ve been focused on diversifying our business with respect to diversifying outside of North America, Europe, South America, as well as diversifying across technologies [Technical Difficulty]. And we think that by layering in that diversification of our portfolio, we’re really well protected in it and we really are a unique portfolio, so that we’re not exposed to one thing [Technical Difficulty]

And I assume you’re seeing some curtailment on your Canadian assets. How do you account for that curtailment? Is the number that you present your actual generation or is it what you’re compensated for with compensated curtailment?

Yes. Rupert, we haven’t seen a material amount of curtailment in our [Technical Difficulty].

Hello?

Hi. Can you guys hear us?

Yes. You did cut out though.

Okay. I think – sorry, we cut out there as well. I think what you might have missed is, we have not experienced a material level of curtailment in our Ontario fleet of assets this quarter.

All right. Very good. Thank you very much.

Thank you. And our next question comes from Moses Sutton with Barclays. Your line is now open.

Thanks for taking my questions and congrats on the strong quarter. Brazil has been mentioned, but hydro performance in North America has been well above the LTA for three quarters now. We calculate 8% capacity factor higher than the LTA. Any visibility into expectations into 2H? Has some of this been due to how you’ve been managing operationally, or is it more or exclusively due to just hydrology conditions?

Hey, Moses, it’s Sachin. Look, I’d love to take credit or our team would love to take credit for operational changes. The reality is, we’ve been in hydro for 30 years and we’ve noticed over a long, long period of time that above and below long-term average cycles are long. So you could have a couple of years of below. You could have a couple of years of above.In particular, our assets that are fed through the Great Lakes, we’ve always seen longer cycles in those. It’s why we make the point not to adjust our guidance or, in fact, adjust our dividend based on variability of the resource. And I know we’ve had a good run recently with above average. But just a few years ago, we were below and people would get down about that.So, I would say, we’ve been in this long enough to know that we plan our business on very long cycles. We measure water inflows, electricity generation, reservoir levels, and diversification in a really detailed way. And over the last 30 years, we feel really strongly that our long-term average is a good, reliable indicator of future earnings power for the business.And, yes, on the margins, obviously, we manage the operations around things like storage, reservoir levels, outflows and regulatory constraints. But in the end, [Technical Difficulty] really has been impacted [Technical Difficulty].

That’s very helpful. And then any color on the strong Canada hydro pricing? Dollar per megawatt hour is up double digits year-over-year. And then looking towards the rest of the year, on a USD basis, would you still expect high 60s per megawatt hour?

Yes. Look, some of that is, because we – we’re benefiting from contractual increases in TPAs in Canada as well above the [Technical Difficulty] price. So we had a 3% increase per year in contracts in Ontario on our hydro fleet. So therefore, if you take that combined with currency movements, it’s showing up as a meaningful increase in the per megawatt hour revenue that we’re earning.But I would say, for the most part, our business in Canada is fully contracted. We don’t have merchant exposure. We are – we have contract term comfortably over the next 10 years in Canada. And therefore, we don’t expect to see a lot of variability in that market and any increases will come from contractual escalations there.

That’s very helpful. And last for me before I jump in the queue. Can you quantify the above LTA performance in terms of its contribution to FFO? We calculate about $30 million or so. I’m just wondering if you can throw a number out there.

Maybe what we can do is, Wyatt or somebody from our team can call you after the call with the exact parameters.

Sure.

We can do that.

That would be helpful. I’ll jump in the queue. Thanks.

Thank you. And our next question comes from Ben Pham with BMO. Your line is now open.

Okay, thanks. Good morning. When you guys think about adjusting this long-term average, I know the last few years, it’s been below and now it’s above, and so there’s a little bit of normalization to think about. And you add in the acquisitions you’ve done and then this 500 to 800 megawatt pipeline. Are you directionally heading towards the upper-end of your 6% to 11% growth rate the next five years?

So first of all, I would say a few things. Just conceptually, the 6% to 11% has nothing to do with hydrology or variability of wind, solar or hydro. We always assume and plan the long-term average. And if we’re below, then that’s a miss in the year. And if we’re above, that’s found money and we don’t pay that.So I want to make sure that principle is clear. And then as it relates to the 6% to 11%, where I think a year ago or two years ago, we gave some visibility that the next 4 to 5 years we had a very strong prediction that we would grow FFO per share at that rate in light of cost reductions, new contract, elements that we had – absolutely, it’s our job to keep replenishing that and build that out over time.So when you see us make investments like we made with X-Elio, the build out that we’re doing with TerraForm, the PPAs that we’re signing, cost reduction initiatives that we have in Latin America, the build out of our business in India, it’s absolutely with the view of growing or maintaining that 6% to 11% FFO growth rate, because we make the investment, but then we have a business plan that we carry out to actually drive cash flow growth.So what we want to make sure investors understand is that our objective is to invest capital accretively on day one. But more importantly, is to surface value from those investments over time because of the strong depth of our operational capabilities. And that is – when we find investments that allow us to both buy for value, but also extract value over time, they tend to over perform even our 12% to 15% during the threshold. So that’s a long way of answering, yes. Of course, we’re trying to continue to build out the runway of that 6% to 11% growth.

Okay. I was just going through just – yes. In that plan, you had said, you only needed 1,000 megawatts of development and you’re already moving 200 megs and then you add this 500 to 800 megawatts and that doesn’t even consider acquisitions you’ve done and will be doing going forward. So it just looks like you’ve really solidified that target that you highlighted at the last Investor Day.On the payout ratio then, you also had a target of 80% FFO by 2022. You’re pointing to 75% this year. And I absolutely agree that you’ve got to adjust for long-term average. But it doesn’t look like you’re heading ahead of plan on the payout ratio?

Yes. So just to be clear, we pointed to 85% annualized. I think 75% came from somebody’s research [Technical Difficulty] Credit Suisse, or I think it was Andrew, who said 75% this year. But we’ve put out 85% on an annualized basis. Yes, we are tracking ahead.Look, on the payout ratio, I think – and I’ve talked to many of you and Wyatt’s talked to many of you, we have the strongest balance sheet in the sector. We have a significant amount of liquidity, a very strong sponsor who bought a lot of shares in the company and we have one of the most diverse sources of access to capital relative to any peer in the industry. So, we’ve never been overly worried about payout ratio, whether it was 98% or now 85%. We’ve always been comfortable that we had the financial flexibility to deliver.However, we got a lot of feedback and we would expect that feedback that we need to bring it down and we need to make sure that the investor community feels comfortable with it. So we’ve been bringing it down and we’ve been doing it simply by surfacing value in our existing assets.So, we’re 85%. We’re far ahead of the 2022 target that you pointed out, it’s good. I think it’s being reflected now [Technical Difficulty] interest in the stock, which is also good. And I think we see a really credible path to getting into the 70s within that same timeframe [Technical Difficulty] once we’re in the 70s. Again, I think combining that with all of the other things I’ve said, we have really, really strong firepower.

Okay.

And, Ben, just to clarify, we’re a 75% payout on an FFO basis year-to-date. But we do have a seasonal business and so we’ve said on a – like an annualized basis [Technical Difficulty] 85%.

Okay. That’s great. Thanks, everybody.

Thank you. And our next question comes from Andrew Kuske with Credit Suisse. Your line is now open.

Thank you. Good morning. You’ve managed to buy or are in the process of buying a pretty big solar pipeline of opportunities. So as you should go ahead and start building some of the solar facilities, do you anticipate a bit of return enhancement versus some of the facilities you built in the past, such as wind and hydro, that just, frankly, take longer to build? And with the solar, should you build them, you have a faster capital recycling trajectory. Is that true? Am I thinking about that the right way?

Yes. You’re hitting the nail. That’s exactly right. [Technical Difficulty] side of it is – the supply chain side of it is really deep today. So you can get converters, panels, connections, structure very quickly. And there’s a bit of a flat supply side investment. So I think it comes back to a little bit of that earlier [Technical Difficulty] is, we bring [Technical Difficulty] kind of opportunity to this business that I think is valued by our partner and the management team there. And just think that would be a really creative way to grow elements of this as opposed to betting on [Technical Difficulty].

Would you care to quantify the return enhancement?

Sure. I mean, look, if we’re building at U.S. dollars at anywhere from – let’s just use our 12% to 15%. Let’s assume at every project, right? And so we’ll have some 18s and we’ll have some 10s. Well, let’s say, we’re blending around that 12% to 15% and we’re monetizing and that’s in U.S. dollars.Typically, today, you’re monetizing these same projects at 7% to 8% to the financial investor. So, if you think about the opportunity for accretion, and let’s just say, you’re not monetizing 100%, but you’re monetizing partial interest. That could be anywhere from 400 to 700 basis points of accretion for every dollar you invest in a very quick timeframe that we go first is build and rotate very quickly. So it’s highly, highly accretive business if you run it well and if you have the expertise.

That’s helpful. And then maybe just a different track for the second question and it really relates to the changes we saw in Alberta. I’m being cognizant it’s not even been a week since the government announced the intention of an energy-only market versus the prior government moving towards the capacity market. How do you think about that in relation to your underwriting of the portfolio purchase you have there, the investment you have with TransAlta?

Yes, good question. Look, I think – and everyone see this. You can see energy-only markets in Alberta. You can see capacity markets in [Technical Difficulty]. And, in the end, deregulated markets are meant to provide a price signal to incentivize new supply to come online. I think what we’ve seen traditionally is markets, particularly in the U.S. Northeast, were strong capacity bid or a strong capacity option. It really incentivized – typically incentivized gas-fired generation.And when you have a strong energy market, you get a bit of a tilting towards more renewable investments, because they don’t qualify for capacity payments. You can’t build a wind or solar farm today and bid it into a capacity [Technical Difficulty]. You get no rating credit for capacity.So I think, you project that dynamic onto Alberta as just a base case working assumption. And from there say, okay, what does that mean? It potentially means a bit more intermittency in that market as [Technical Difficulty]. And it means that assets where you have embedded storage could have more underlying value.And then if you take that to our underwriting, why do we like the hydro portfolio? It has a significant storage capability and it has significant ability to provide stabilization services to the grid, all of which becomes valuable either in the near-term or in the long-term, as thermal comes out of the supply stack as [Technical Difficulty]. So, I don’t want to speak on the company’s behalf, but I think that’s a framework from which – within which to think about it. And I think, from our perspective, for us, it’s a net positive.

Okay. That’s great. Thank you.

Thank you. [Operator Instructions] Our next question comes from Mark Jarvi with CIBC Capital Markets. Your line is now open.

Thanks. Good morning. I want to go back to X-Elio and the development opportunities. How do you guys see about securing off-take and types of contracts with those development projects? And maybe talk about any expertise on origination that that team might bring that Brookfield doesn’t have existing?

Yes, that’s a great question. That is what we like about the management team. They have a long history of signing PPAs, securing investor relationships and securing all of the permitting and interconnection requirements of solar development. We have that in our organization, but I would say, this management team is very strong, has shown a track record of being able to do it in a way that creates value on a simple buy and build maturity basis. And we think that we can obviously leverage that team and provide assistance where needed with our own existing operators and our access to capital that can only make the team’s ability to serve the value over the long-term even better.So we’re really happy with the team. Our partner, KKR, has been in this investment for a number of years already. So we feel like we have a like-minded partner from a value creation perspective. And we feel like we had a great ability to meet with both our partner and the management team is diligent yet comfortable that their track record [Technical Difficulty].

Okay. And then is there a belief that storage is going to be increasingly key to building out that solar pipeline and the type of contracts you’ll be looking to procure?

No. We’re not banking on batteries or storage as part of our underwriting thesis. Obviously, storage is needed around the world and then batteries are one option for storage. But they’re still far away, they’re still expensive. There still isn’t a global leader when it comes to electric battery production. You’re starting to see the auto manufacturers get into this in a big way for their own businesses, but you’re not seeing what we saw in wind and solar manufacturing specific to the electricity supply side starts to get created. So I think, we’re not betting on it and it’s not part of our [Technical Difficulty].

Okay. And maybe just turning to pump storage in the U.S. And I know you guys have had some projects sort of quietly in the background. You haven’t been too vocal about it. What do you guys see in terms of the current prospects for that, whether it’s permitting or support by FERC, or where do you guys see opportunities or is it still a bit of a ways off?

Yes. We have a handful of pump storage sites, the bulk of which are in [Technical Difficulty] and these are small-scale storage sites, yes. We have some expansion opportunities [Technical Difficulty], one of which is with our Bear Swamp facility that we’re actually pursuing currently and close to delivering and in Ontario, candidly. Pump storage is one of those where the price of the cost to build, you need a PPA.And I’d say, at this stage, still don’t see a willingness from utilities or regulators to provide the necessary compensation to deliver it. And if you don’t have a PPA, you need –either you need existing embedded infrastructure like we have at Bear Swamp, where it’s just an expansion aligned with a capacity market like you have in New England that can make the economics work. So doing it in New England, doing it with Bear Swamp, but I would say the other projects are still on hold in anticipation of the significant value.

Okay. Thanks, guys.

Thank you. And our next question comes from Frederic Bastien with Raymond James. Your line is now open.

Hi, good morning, guys. Your pipeline of opportunity seems to have grown exponentially in the past 12 months, at least to me, which I guess is a good problem to have. But just wondering how you reconcile the opportunity to invest in certain assets versus others and probably more importantly, the size of the equity check that you decide to write against these assets?

Hi, Frederic, thanks for the question. Yes, look, I think your observations are bang on. We spent the last six or seven years trying to globalize the business and broaden out the technology perspective. So that we could be in exactly the position we’re in today, which is having many, many opportunities to parse through, such that we can pick the best opportunity [Technical Difficulty] what makes an opportunity best?I’d say we start from a risk-reward perspective. Opportunities where we see the highest potential return and the lowest risk. And risk is both from the development from a geographical perspective, a currency perspective and return is what we can surface from those assets by buying well and then operating well. And so we – that is our criteria. We also have strengths. Even if we see very, very meaningful emerging market opportunities, but that would skew the nature of the business, we’re going to be very careful about them.We’ve said to investors and to our analysts that we want to keep the bulk of our investments in North America and Europe and we want to have 25% to 30% of sort of emerging market exposure and we want to have more countries in that emerging market bucket. So we feel like we’re not changing that strategy or that [Technical Difficulty]. So that’s the overlay when we look at how to pick investments. But in the end, it’s about risk and reward and what we can build over most accretively to our investors.From an access to capital perspective, we’ve also prioritized our balance sheet strong. Again, having a [Technical Difficulty] balance sheet is unique. But it’s not just a flag we can wave, it also gives us tremendous financial flexibility. As Wyatt said earlier, we have ample up-financing opportunities in Brazil, in our various wind and solar farms where our financing structures are much shorter dated than our PPA term, and in our hydro portfolios where we have contracts rolling over and refinancings coming up where we can up-finance the business.So today, I would say, we probably have close to $1 billion of up-financing opportunities. We have significant asset recycling opportunities, and all of that is a function of keeping a strong balance sheet and the financial flexibility [Technical Difficulty]. So I don’t think the strategy is going to change and we’ll just continue to grow the business [Technical Difficulty].

Thanks. And as of July 31, which technologies do you believe present BEP with the best risk-reward opportunities?

That’s a good question. Look, hydro is still, I’d say, when you find hydro for value, it is still an incredibly stable source of cash flow that typically grows over time in value and the intrinsic value of the business. It really supports the underlying intrinsic value of the business and the actual nature of it is a nice match to our perpetual equity that we issue.Wind and solar, I’d say now that the costs have come down, are really good asset classes. They have a meaningful amount of growth in front of them. The technology has gotten a lot better. The costs are there now that they don’t need subsidies, which was always something that we were worried about.So I’d say, those three technologies, which are now considered alt power technologies, are really strong. They underpin our growth. And we said at Investor Day maybe a year ago that if the world moves to 25% renewables in the markets where we’re an investor, it is somewhere in the range of $5 trillion to $6 trillion of growth opportunities for this asset class in this sector.We are a very, very small piece of that. We think we’re a meaningful piece and we think our business has an incredible runway of growth for the next decade, just given what’s happening on the planet from supply transitioning to [Technical Difficulty].

Okay. Thank you so much.

Thanks, Frederic.

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to Sachin Shah for any closing remarks.

Okay. Well, thank you, everyone, again for your support and your continuing interest in the company. We wish you all a great balance of summer, and we’ll talk to you at the end of the third quarter for our next quarterly update. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program, and you may all disconnect. Everyone, have a wonderful day.