BrookField Renewable SWOT Report


Summary

  • BEP maintains “a social license to operate” as one of the world’s largest public pure-play renewable power companies.
  • BEP has achieved significant scale that provides an important competitive advantage and the capability to acquire undervalued or underperforming assets.
  • BEP has grown Funds from Operations by 10% annually since 2011. The partnership just announced a 5% distribution increase for 2020.
  • The partnership operates from Brookfield’s headquarters in Toronto, is legally domiciled in Bermuda and its functional currency is the U.S. dollar.

Introduction

Brookfield Renewable Partners (NYSE:BEP) is a subsidiary of Brookfield Asset Management (BAM). They are diversifying their long-standing hydroelectric business is into solar and wind power generation, with a small but growing interest in distributed energy and energy storage. BEPC will be a new Canadian corporation will mirror BEP and enable index inclusion and participation by ETFs. Funds from Operations was up 13% in 2019, to $761 million.

As of the close on Friday, February 7, 2020, BEP’s unit price was $51.99. The current quarterly distribution is $.5425, for an annual payout of $2.17 and a current yield of 4.17%. The distribution has increased for 11 consecutive years and BEP’s S&P credit rating is BBB+.

Strengths

Parent company BAM is one of the stronger alternative asset investors and BEP manages Brookfield’s renewable energy business. BAM owns about 60% of BEP units and provides BEP with capital through separate BAM funds and through individual and institutional investors. Typically, BEP has operational control of its projects and will own a percentage of the assets.

Brookfield’s long history and global connections give it access to highly qualified personnel. BEP CEO Sachin Shah is a capable manager with a proven track record that continues Brookfield’s profitable involvement in the renewable energy sector.

Environmental, sustainability and governance issues are important to today’s investors. ESG issues have long been part of BEP’s DNA. In BEP’s Q4 2019 earnings callCFO Wyatt Hartley said, “We believe our portfolio’s inherent environmental attributes, coupled with our long-standing practices around maintaining a social license to operate provide significant tailwinds to demand growth for us.”

Weaknesses

While I view BEP’s relationship with parent BAM as a net positive, some investors will see the relationship with BAM as tilted in favor of the parent due to fees paid by BEP to the BAM-controlled General Partner. For this reason, I have invested in both BAM and BEP. 

BEP uses credit markets to fund some of its investments. Today’s low interest rates make it very attractive to invest alongside Brookfield, but higher rates could make it more difficult to find co-investors. BEP enters into long-term contracts to provide power to a variety of counter-parties, so they are to some degree dependent on the health of those businesses. 

While it has been a very successful business model for Brookfield, there are inherent risks involved with buying undervalued and/or underperforming assets. BEP has offered to acquire the remaining 38% of TerraForm Power (TERP) in an all-stock transaction. 

Opportunities

Some of Brookfield’s investment partners compensate for today’s low interest rates on fixed income securities funds by turning to alternative investments such as those provided by Brookfield, particularly in renewable, sustainable projects such as BEP’s.

BEP has spent the last decade diversifying from hydroelectric into wind and (primarily) solar. Now, they are beginning to invest in distributed energy and storage projects for both commercial/industrial and residential.

Most renewable energy companies are either unrated or have very low credit ratings. BEP has a relatively strong BBB+ S&P credit rating. The financial strength reflected in the rating is evidence of the scale that provides BEP the capability to opportunistically buy smaller operators to increase margins.

BEP is creating a new Canadian corporation BEPC, which will be a subsidiary of Brookfield Renewable Partners LP, designed to mirror the opportunity to invest in BEP. BEPC will be eligible for inclusion in index funds and no K-1 forms. BEP expects BEPC shares to be spun off to BEP unitholders and to begin trading in the first half of 2020.

Threats

Both the parent company BAM and BEP benefit from Brookfield’s global reach and strong reputation among investors, governments and contractual counter parties. The breadth of this scope also opens Brookfield to cyber mischief, the threat of terrorism and to adverse political changes. 

Brookfield has been successful in a wide variety of business cycles. BEP has enjoyed the benefits of low interest rates. BEP’s management is capable of adapting to higher rates, but it is a potential threat.

As alternative investments become increasingly popular, more traditional financial institutions will find ways to enter this arena. While few institutions can offer Brookfield’s global scale and ability to undertake very large projects, BEP’s competition could increase in the future. 

Long-term Business Outlook

It’s not often that a CEO speaks with the confidence of BEP’s CEO Sachin Shah in their 2019 Q4 earnings call: “We are very well positioned to participate in the decarbonization of global electricity grids that will occur over the next 25 to 50 years.”

As BEP grows its renewable energy capacity from the present 19,000 megawatts, Shah said, “Our capabilities provide communities, governments and the private sector around the world the ability to accelerate the transition to a greener future.”

BEP has offered to acquire the 38% of TerraForm Power (TERP) that it does not already control (with its investment partners) by using BEP units as currency for the acquisition.  

From BEP’s 2019 Q4 earnings release, the Hydroelectric segment contributed 70.5% of 2019 FFO. Wind contributed 16.7%; Solar 10.1%; and Storage 2.6%. Solar and Storage likely will drive FFO in coming years.

The company’s goal is to consistently provide investors with a total return 12-15% annually on a per unit basis.

I contribute to Kirk Spano’s Margin of Safety Investing where we offer a more in-depth analysis of individual companies. Members have access to a SWOT Report (Strengths, Weaknesses, Opportunities, Threats) on the company.

Members are given support levels to buy and a “bottom fishing” price for backing up the truck. Invest with us in a changing world that demands a margin of safety.

Disclosure: I am/we are long BEP, BAM, BIP, BPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written by Ted Leach (Dividend Sleuth) with input from Kirk Spano and David Zanoni. The article is for informational purposes only (not a solicitation to buy or sell stocks). Ted is not a registered investment adviser. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.