Brookfield Renewable Energy Partners L.P. – A Great Mix Of Growth And Dividends

 

Red Rock Falls Generating Station (41 MW) - Algoma: Mississagi River Source: Flickr
Red Rock Falls Generating Station (41 MW) – Algoma: Mississagi River
Source: Flickr

Below is part of my latest investment research. I usually put my thoughts on paper and sometimes I make an article out of it. My latest piece is on Brookfield Renewable Energy Partners L.P. (BEP, BEP.UN), a much under-followed security that deserves more attention. As the name state, BEP is in the renewable energy industry. They are probably one of the the largest, if not the largest, pure play renewable energy investment in the world. BEP owns and manages 250 power facilities, mostly hydro plants, some wind farms and biomass. BEP’s portfolio is composed of high-quality long life assets generates very reliable growing cash flows for many years since the majority of the cash flow is contracted through PPAs with a lifetime of over 20 years in some cases. BEP’s strategy for growth is through disciplined M&A and organic projects. They currently manage 7,300 MW in North America, Brazil, and Europe. If you are looking for reliable growing income and an element of growth, BEP should be on your candidate list.

Enjoy,

Brian

This is just a sample of the article. I can’t publish the whole article because the rights are owned by Seeking Alpha. Some articles are free and some are not, depending on what signed up for. Feel free to check out the whole article and others on their website

Reposted from Seeking Alpha
By Brian Langis

Summary

  • BEP focuses primarily on long-life renewable power assets that provide stable, long-term cash flows, and which are well positioned to appreciate in value over time.
  • The company seeks a distribution growth target of 5-9% per year and a payout ratio of ~65% of funds from operations.
  • BEP invests and owns real assets of high quality and with strong growth prospects. The objective is to deliver long-term gross returns of 12-15% on a portfolio basis.
  • The recent dip in the stock provides a nice entry point.
  • The Brookfield family of products has a great history of value creation.

If you are looking for a very long-term safe investment that provides reliable growing dividends and reasonable growth prospects, Brookfield Renewable Energy Partners L.P. (BEP, TMX: BEP.UN) should be on your candidate list. BEP focuses primarily on long-life renewable power assets that provide stable, long-term cash flows, and which are well positioned to appreciate in value over time.

BEP is one of the largest publicly traded pure-play renewable power platforms in the world. As of March 31, 2015, the company owns and manages 208 hydroelectric generating stations, 37 wind farms, 2 natural gas power plants, and 3 biomass plants, for a total of 250 power-generating facilities. Overall, the assets that it managed or manages have 7,265 MW of generating capacity and annual generation of 25,562 GWh, based on long-term averages. This is a global portfolio with assets across 14 power markets in North America, Latin America and Europe. BEP generates enough electricity from renewable resources to power 4 million homes each year. The structure is a limited partnership established in Bermuda since 2011. Brookfield Asset Management (NYSE:BAM) owns, directly and indirectly, 63% of BEP. Below is a summary table of the partnership:

Thesis

Here are some of the mains reasons why I like BEP as a very long-term investment:

  • The company invests and owns real assets of high quality and with strong growth prospects. The objective is to deliver long-term gross returns of 12-15% on a portfolio basis.
  • A solid, experienced management team with a “boots on the ground” approach. Has a history of making disciplined conservative acquisitions.
  • BEP benefits from its strategic partnership with BAM.
  • It has a highly stable cash flow profile sourced from predominantly long-life hydroelectric assets, the vast majority of which sell electricity under long-term power purchase agreements (PPAs). BEP generates significant free cash flow. A portion of this is re-invested, and the other is returned to unitholders.
  • Provides inflation protection (contractual clause for rising prices).
  • A great investment for income seekers. BEP has a history of increasing distribution to unitholders. The company seeks a distribution growth target of 5-9% per year and a payout ratio of ~65% of the funds from operations (FFO).
  • Invest in the renewable power sector (reducing contribution to global climate change). Also, coal is retiring, making room for more expensive generation.
  • BEP has large moat. There are a lot of obstacles in the way if you plan to open a hydro plant tomorrow.
  • Investment-grade balance sheet (BBB credit rating). Maintains a ~40% debt-to-total capital ratio.

I like that the cash flow is attached to real long-life assets, instead of, let’s say, to a brand name. I know, to a certain degree of certainty, that the hydro plant and its contract will be providing cash for the next five to ten years. I can’t make that same prediction regarding my favorite brand or store at the mall. Sure, BEP is not a sexy investment, and it’s actually one of the most boring investments one could make. It has all the characteristics of a boring investment: cash-rich, high cash margins, conservative management, real long-life assets etc… It’s hard to have a decent BBQ conversation when you have invested in a bunch of hydro-generating stations and wind farms (Nobody is going to ask you about the hydro inflow rate last quarter or how the wind is blowing in Ireland). But keep in mind, this is an investment for long-term income and growth. As long as the rivers are flowing and there’s wind in Ireland, you can sleep at night.

Source: BEP Investor Profile May 2015 – Slide 6

The performance returns table above demonstrates the superior historical performance of BEP as of December 31, 2014. Of course, that wonderful 15-year historical performance is no guide to the future. However, because of the company’s solid business model and high-quality assets, above-average returns wouldn’t surprise me over the long run.

The stock price has been weak of late, likely a function of the rise in bond yields, which has pressured interest rate higher and poor hydrology. Investors, particularly those with a longer-term view who appreciate BEP’s strong dividend growth outlook, should take the opportunity created by the recent pullback to take a position.

While the overall business may be fairly valued on the surface at about 13x trailing adjusted EBITDA, the normalization of hydrology, organic growth and accretive acquisitions suggests that BEP could appreciate by 13.7% in 2015. The details of my valuation are below.

The Brookfield Asset Management Family

To better understand BEP, it’s important to understand the parent company, Brookfield Asset Management. You can’t talk about BEP without talking about BAM, since they are in the same family. BAM is a global manager of real assets with $207 billion AUM ranging from property, renewable energy, infrastructure, private equity and others. Sorting out the Brookfield family can be a challenge. Brookfield Asset Management is the parent company at the top. It has ownership stakes in the three Brookfield public companies and private listings, as demonstrated in the chart below:

Source: BAM Corporate Profile Slide 6 – Q1-2015

I like the whole Brookfield family. There’s something for everyone. BAM is more for the growth-oriented investor, and the listed partnerships (BPY, BEP, BIP) are interesting for their dividends. A significant portion of BAM’s earnings are from the dividends its listed partnership distributes. The main reason why they don’t roll up the whole structure to BAM is because the market will apply a conglomerate discount (BAM is a former conglomerate with a colorful history). A conglomerate is more complicated to value and more confusing. In its current form, you attract more pure-play investors, since real estate investors can invest in BPY and energy investors can invest in BEP.

This is just a sample of the article. I can’t publish the whole article because the rights are owned by Seeking Alpha. Some articles are free and some are not, depending on what signed up for. Feel free to check out the whole article and others on their website

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