Brookfield Renewable: the second quarter showed new projects and investments

simonkr/E+ via Getty Images

One of our favorite renewable energy utilities, Brookfield Renewable (NYSE: BEP), just reported fairly strong Q2 2022 results, with FFO of $294 million, or $0.46 per unit, a 10% year-over-year increase. The company has ordered an impressive number of 1,000 MW of development projects, which are expected to bring approximately $11 million of FFO annually to Brookfield Renewable. The company also closed or agreed to invest $3 billion ($650 million net to Brookfield Renewable) of new capital during the quarter.

BEP continues to expand its development pipeline, which has now reached a whopping 75,000 megawatts, and which also includes approximately 8 million metric tons of carbon capture and storage. BEP continued its asset recycling strategy to free up capital, with approximately $560 million ($90 million net to Brookfield Renewable) of asset recycling activity during the quarter.

Operating results

During the quarter, the hydroelectric segment generated FFO of $205 million. Hydro assets continue to demonstrate their ability to capture higher electricity prices through inflation-linked power purchase agreements and a positive merchant price environment. Reservoirs are approximately at long-term averages, positioning the portfolio well to capture the higher power prices expected in the second half of the year. The wind and solar segments generated a combined FFO of $150 million. The distributed energy and sustainable solutions segment generated $38 million of FFO.

Growth

So far this year, the company has deployed or agreed to deploy $4.5 billion ($1 billion net to Brookfield Renewable) of capital across a wide range of investments, including battery storage, capture carbon emissions, distributed generation, and large-scale wind and solar power.

The global distributed generation business continues to be an important growth area. Over the past twelve months, the company has tripled its U.S. distributed generation business to 6,500 MW through various organic initiatives. The company recently agreed to acquire a major U.S. integrated distributed generation developer for $700 million ($140 million net to Brookfield Renewable), with this investment BEP further strengthens its position as a global generation leader distributed with 10,300 megawatts of operating and developing assets.

The company has also expanded its North American carbon capture and storage platform. Under an agreement with the California Resource Corporation (“CRC”), the company will partner to fund the development and construction of identified CCS projects in California, with an initial goal of deploying up to $500 million capital dollars ($100 million net to Brookfield Renewable). The joint venture is expected to have a first-mover advantage through CRC’s ownership of potential CO2 storage reservoirs that are a key asset for carbon capture and storage in California, one of the world’s most desirable jurisdictions. given the state’s Low Carbon Fuel Standards credit system. The joint venture targets the injection of 5 million metric tons per year and 200 million metric tons of total carbon dioxide storage development, which, if achieved, could result in an additional investment of approximately $1 billion ( $200 million net for Brookfield Renewable).

During the quarter, the company also made an energy transition investment in a leading private owner and operator of critical power and utility assets with 1,200 megawatts of installed capacity. The investment will be used to fund both growth and decarbonization initiatives, including the implementation of a Paris-aligned energy transition plan that includes an approximately 1,300 megawatt renewable development pipeline. BEP has committed to invest up to $500 million ($100 million net to Brookfield Renewable) through preferred stock and a 20% equity interest in common stock.

These are just a few of the major growth investments made by the company during the quarter. To quickly mention a few of the others, in Brazil, the company has signed an agreement to acquire a new high-quality 600 megawatt solar project in advanced development. In India, it signed an agreement to acquire its first renewable energy park. In the rest of Asia, the company has agreed to acquire approximately 750 megawatts of fully contracted wind assets, consisting primarily of projects that are ready to build or under construction.

The most important point for investors, in our view, is that the company is on track to commission an additional 2,800 megawatts of capacity by the end of the year, which should contribute further 40 million dollars in annual FFO.

Balance sheet

The balance sheet remains strong, with around $4 billion of cash on hand and no major short-term maturities. Additionally, with the recent $15 billion closing of Brookfield’s Global Transition Fund, the company has access to capital to invest alongside the company. The average duration of debt across the entire portfolio is around 13 years, with very limited floating rate debt, almost all of which is in Brazil and Colombia, where the company enjoys full escalation inflation in its contracts.

Evaluation

Unfortunately, stocks aren’t cheap right now, and exceptional growth and excellent management have to be paid for by paying an above-average EV/EBITDA multiple. The days when you could invest in BEP at a 10x EV/EBITDA multiple seem over. Given the growth and quality of management, we think the current multiple of around 20x may be justified, but investors should be aware that they are paying a premium for stocks.

Chart
BEP given by Y-Charts

Looking at the Seeking Alpha valuation page for BEP, we can see that the trailing 12-month EV/EBITDA is about 44% above the industry average, and the forward EV/EBITDA is above approximately 117% above the industry average.

BEP EV/EBITDA

Looking for Alpha

Thanks to its growth and the quality of its management, BEP has tended to trade at a premium to the industry, so we find the current valuation to be high but not excessive, especially considering that the he current macroeconomic environment favors the company. We explain in more detail why the BEP is relatively well protected, and could even benefit from an inflationary environment in this other article.

In summary, BEP is trading at around 20x EV/EBITDA, around a third higher than its 10-year average of around 15x, but the company is showing significant growth and strong operating results, so we believe the valuation is justified.

Risks

The main risk we see is that the valuation is a bit above its historical averages, and apart from that, we think investors should at least consider the following risks:

  • Power Generation: Some of the power generation assets are variable, there have been drought years which have had a significant impact on hydroelectric power generation, there may be years when less wind has had an impact on the production of wind energy, etc.
  • Electricity Pricing: A percentage of Brookfield’s renewable energy generation is sold at market prices, which at times can be unfavorable.
  • Financing: Brookfield Renewable has significant debt and is at risk of having difficulty refinancing certain debt or being forced to do so at unfavorable rates.
  • Low fossil fuel prices: If fossil fuel prices drop significantly, it could jeopardize the cost advantage the company currently has and could slow the development of new projects.

Conclusion

We were very pleased with all of the renewable energy projects commissioned, purchased or developed by the company during the quarter. The growth of the portfolio is impressive and should make the FFO grow in the future. Three areas are becoming increasingly important for the company, these are distributed energy, carbon capture and storage and energy transition financing. The company made investments and deployed capital in all three areas during the quarter. We think equities are fully valued, but can still offer decent returns to investors.

Valerie J. Wallis