The Brookfield group of companies recently held its 2018 Investor Day. This article touches upon the content of the Brookfield Renewable Partners (BEP) presentation.

I view BEP as having significant long-term growth potential and the ability to continue to generate attractive investment returns. As a result, I have acquired additional units for the FFJ Portfolio.

 

Summary

• Like the other BAM entities I have analyzed, BEP adheres to BAM’s 5 core principles.
• BEP has recently initiated a capital recycling program similar to other BAM entities in which it rotates its investment from mature assets with lower IRR potential to new opportunities in which it can generate superior returns.
• BEP’s current annual distribution is 100% of AFFO but it has visibility over cash flow growth and the annual investment required to maintain cash flows is minimal.
• Servicing its growing distributions should not pose a problem and management has projected an improvement in BEP’s FFO and AFFO payout ratios over the next 5 years.
• I view BIP as an attractive long-term investment suitable for investors seeking a safe and steadily increasing stream of quarterly distributions.
• I have just acquired several hundred BIP units for the FFJ Portfolio.

Introduction

As a long time shareholder of Brookfield Asset Management (TSX: BAM-a) (NYSE: BAM), I continue to be impressed with the entire group of companies. It is only recently, however, that I have decided to increase my relatively insignificant exposure to the Limited Partnerships to slightly more meaningful levels.

On October 3^rd I uploaded a post on Brookfield Property Partners L. P. (TSX: BPY-UN.TO) (NASDAQ: BPY). And on October 4^th I uploaded a post on Brookfield Infrastructure Partners L.P. (TSX: BIP-UN.TO) (NYSE: BIP). In both cases, I ended up acquiring a few hundred units of each for the ‘side’ accounts within the FFJ Portfolio after conducting my review.

As I indicated in these recent posts, if your primary objective is to generate long-term capital gains then investing in BAM might be the preferred investment. Should dividend income be of greater importance to you than the potential for capital gains then investing in the higher dividend yielding Limited Partnerships might be your preferred choice.

Another advantage to investing directly in the Limited Partnerships is that you can target your investment to specific sectors. You may, for example, wish to have exposure to the renewable energy space but not the real estate space.

Based on my analysis of Brookfield Renewable Partners L.P. (TSX: BEP-UN.TO) (NYSE: BEP) which I conducted for this article, I have acquired a few hundred units for the ‘side’ accounts within the FFJ Portfolio.

Overview

BEP's Corporate Profile provides a comprehensive overview of the company.

The world is in the early stages of a decades-long transformation from fossil fuels to renewable energy with this transformation being led by:

• Climate change;
• Government policy and subsidies;
• Historically low cost of capital;
• Increased demand from financial investors for long-duration renewable assets.

BEP’s analysis of the Renewable Energy space indicates that Solar and wind still account for less than 10% of global power supply (74% nuclear and fossil fuels, 17% hydro, and 9% solar and wind). BEP estimates that in excess of $11T of investment is estimated to be required to replace existing, non-renewable capacity globally.

As evidence of the global transformation to renewable energy, various businesses such as transportation and other industrial businesses are going through a significant restructuring. Traditional thermal fuel sources, which were powering electricity or transportation fleets, are being slowly replaced by electricity and carbon free electricity.

This transformation will take several decades. Given this trend, BEP is building a business that can leverage global growth and where it can acquire great businesses and great assets throughout the world at its target return levels.

The challenge for many industry participants is that just within the past 5 years, $1.5T has been invested in renewable energy (47% solar, 35% wind, 17% hydro, and 1% other) and over 1 million megawatts of new renewable capacity has been added to global grids (42% solar, 33% wind, 20% hydro, and 5% other). Many of these projects have been undertaken at high valuations and returns have been low (4 – 10% IRR for projects in operation and 7 – 12% IRR for projects in development).

This growth and low return environment has resulted in some industry participants using financial structures or other types of financial engineering to drive their target returns. This has resulted in some extreme financial challenges for some industry participants.

BEP, on the other hand, employs a very prudent capital structure. While it uses a very conservative financing approach, it is important not to gloss over the fact BEP drives value by being a smart buyer, by operating the assets well, and by ensuring it can drive margin through operations.

Unlike many other industry participants, BEP has had 12 – 15% IRR targets and these targets remain for future projects.

Being part of the BAM group of companies, BEP adheres to BAM’s 5 core principles:

• Acquire high quality assets;
• Invest on a value basis;
• Enhance value through operations;
• Contrarian investing;
• Large-scale and multifaceted.

It is imperative that investors in any one of the BAM companies realize that the manner in which the businesses operate entails the use of a capital recycling program. When an asset is acquired, the intent is not to hold the asset in perpetuity. The capital recycling program instills capital discipline to ensure that businesses are sold when returns are maximized and not when cash is needed.

Historically, BEP has not employed a capital recycling program but it recently has started to use it as part of its funding strategy; it has announced ~$0.315B of initiatives in the last 18 months. Under the program BEP will sell assets generating single-digit returns and will re-deploy the sale proceeds toward assets which will generate 12 - 15% returns.

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