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Bruce Flatt, Chief Executive Officer of Brookfield Asset Management (BAM), in Tokyo on May 16, 2019.HIDEYUKI SANO/Reuters

The infrastructure arm of Brookfield Asset Management Ltd. BAM-A-T is boosting its stake in utility provider FirstEnergy Corp.’s FE-N transmission unit with an all-cash deal worth US$3.5-billion, building on an initial investment last year that has done well as inflation spiked.

Brookfield Super-Core Infrastructure Partners is buying a further 30-per-cent ownership interest in FirstEnergy Transmission LLC. In 2022, Brookfield paid US$2.4-billion to buy a 19.9-per-cent interest in FirstEnergy Transmission, a holding company for three subsidiaries that operate transmission utilities – including nearly 39,000 kilometres of power lines connecting the U.S. Midwest to the mid-Atlantic.

The deal is expected to close early 2024, at which point Brookfield will own 49.9 per cent of FirstEnergy Transmission with a total investment of US$5.9-billion. The Ohio-based parent company, FirstEnergy, will still be the majority owner in charge of operating the business.

Utility companies are attractive to investors such as Brookfield because they are resilient businesses that generate stable cash flows, even when markets are volatile. And utility assets became even more attractive as inflation and interest rates climbed higher, serving as a low-risk alternative to fixed-income assets with solid but typically modest returns.

In 2021, with the likelihood of a spike in inflation on the rise, Brookfield snapped up utility assets in the United States, Britain and Australia that were regulated or contracted, “with the expectation of inflation increases in the portfolio greater than the 2 per cent assumed in the purchase prices,” said Bruce Flatt, Brookfield’s chief executive officer, in a letter to shareholders last May.

On Thursday, Brookfield’s infrastructure affiliate, Brookfield Infrastructure Partners LP (BIP), reported a 5-per-cent increase in funds from operations from its utilities segment in 2022, which reached US$739-million. Average inflation indexation of 8 per cent helped boost results, as did contributions from two Australian utility acquisitions that Brookfield completed in the first half of last year.

“Investments in infrastructure assets, such as utilities, pipelines, ports and telecom towers are essential for the functioning of the economy and society,” said BIP CEO Sam Pollock, on a conference call with analysts. “While not agnostic to the macro environment, they typically perform well through all parts of the market cycle and notably outperform during economic troughs.”

By raising new money from Brookfield, FirstEnergy is aiming to reduce its debt and strengthen its financial position so it is better prepared to meet rising capital needs, as the U.S. ramps up its transition to cleaner energy.

FirstEnergy plans to use proceeds from the sale of a larger stake to Brookfield to speed up the pace of its debt repayments after it reduced holding company debt by US$2.5-billion last year. And it will also add an extra US$1-billion to the investments it plans to make in its long-term growth by 2025, bringing its target to nearly US$18-billion.

The agreement with Brookfield “speaks to the strength and potential of our regulated growth strategies,” which include plans to make additional investments in smart grids and clean energy, said FirstEnergy’s board chair and interim CEO, John W. Somerhalder, in a prepared statement.

The regulated entities held under FirstEnergy Transmission are American Transmission Systems Inc., Mid-Atlantic Interstate Transmission LLC and Trans-Allegheny Interstate Line Co. FirstEnergy’s electric distribution companies serve customers in six U.S. states from Ohio to West Virginia.