Brookfield Renewable Partners L.P.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Brookfield Renewable Partners L.P. is a global renewable power platform, owning and operating a diverse portfolio of hydroelectric, wind, solar, and storage facilities. It generates value by developing and operating renewable energy projects, and then selling the power produced at fixed prices over time, aiming to create stable cash flows.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Brookfield Renewable Partners (BEP) is a major player in the global renewable energy sector, operating a diverse portfolio of assets across multiple technologies and geographies. Its business model is rooted in generating stable, long-term cash flows from contracted power generation and strategic asset management, but is far more diversified in its business compared to other pure-play renewable energy providers. Here’s a closer look:

  • Renewable Energy Focus: BEP’s portfolio is diverse, spanning hydroelectric, wind, solar, and energy storage, thereby mitigating its exposure to any one technology or resource type. They don’t just develop projects, but also strategically manage their assets, adding value over time.
  • Global Reach: With operations primarily in North and South America, Europe, and Asia, BEP benefits from diverse market conditions and regulatory frameworks, which improves its ability to navigate challenges specific to a region. Having such a spread also enables more risk-adjusted growth, since one region going through problems may be offset by another’s growth.
  • Business Model: BEP’s model is focused on long-term, contracted, cash flows from power generation, which are typically inflation-protected, thus offering a hedge against rising costs and inflation. BEP is a yieldco that generates an inflation-linked return for shareholders.
  • Customer Base: Major customers are typically utilities, large corporations, and municipalities, all of whom typically require long term stable reliable power supply, creating more contractual stability.

Industry Trends The global energy sector is undergoing a significant transformation, with a rapid shift towards renewables driven by growing concerns about climate change. Key industry trends influencing BEP include:

  • Increasing Renewable Energy Demand: Government policies and regulations worldwide are incentivizing the shift to renewable energy, creating a favorable environment for BEP’s growth.
  • Technological Advancements: Continued innovations in technologies, like large capacity batteries, for example are improving the efficiency and reducing the cost of renewable power generation, expanding opportunities for companies with innovative ideas, such as BEP.
  • Emphasis on Sustainability: Businesses and consumers are increasingly prioritizing sustainability, creating a greater demand for clean energy sources, further benefitting BEP. The company aims to deliver reliable and affordable sustainable power solutions.
  • Electrification: Global economies are becoming more dependent on electricity rather than fossil fuels, giving an advantage to established and competent producers of electricity such as Brookfield.

Competitive Landscape BEP operates in a relatively competitive environment. While companies like NextEra, Iberdrola, and Orsted compete in the renewable energy development sector, BEP’s scale and scope of operations creates greater diversification, which is something that they are known for and differentiates them from other major competitors. BEP is able to attract capital, build and operate complex renewable facilities, and manage costs effectively.

  • Diversified Portfolio: This strength means that they don’t need to worry as much about disruption from new technologies and are not limited to a particular sector.
  • Global presence: BEP is less prone to local economic and regulatory problems compared to some peers, making its growth less choppy and risky.
  • Execution capabilities: BEP has the skills to plan, build and manage complex infrastructure in challenging places, making their projects a lot more lucrative compared to their peers.
  • Financial Stability: BEP is a high capital intensive business, but it is a stable company with low cost of capital.

Financials

The following key financial information was drawn from the company’s latest documents and earnings calls:

  • Revenue: BEP has experienced strong revenue growth year over year, driven by increased generation capacity and pricing power. For instance, in the latest quarterly earnings call, Brookfield Renewable reported an increase in revenue, which has been greatly boosted by the new wind farms in North America.
  • Profitability: As a renewable energy provider, BEP needs to strike a balance between high infrastructure costs and their revenues. Although profitability has fluctuated due to short term cost and operational difficulties, it is still strong overall, especially when looking at recurring margins.
  • ROIC: BEP has struggled to raise returns on capital invested over the past year, with ROIC hovering at ~7.5%. While this is still a good level of ROIC, it is below their targeted returns, and management must focus on ways to improve it.
  • Growth: BEP continues to acquire and build more renewable energy facilities each quarter. A significant chunk of BEP’s operating performance and earnings growth is through accretive acquisitions and continued expansion into new segments.
  • Cash Flow: It is not unusual to find high levels of short term debt for companies in the energy space. This debt needs to be repaid quickly and hence the company must have a consistent stable cash flow from its assets to handle all the debt that it takes. BEP has had healthy cash flows and a history of dividend payments.
  • Debt & Capitalization: BEP utilizes debt strategically to fund expansion initiatives. As with most energy companies, high debt levels are a common feature. As of December 31, 2022, the company’s total capitalization was $164.8 billion, of which total debt accounted for $77.8 billion.

Latest Concerns/Controversies/Problems Like most companies, BEP has also had some issues in the past, with recent issues such as:

  • Cost Overruns: BEP has had some cost overruns due to both inflation and a volatile energy market, forcing a renegotiation of existing contracts, leading to uncertainty in cash flow.
  • High Debt Levels: Like most infrastructure companies, BEP has high debt levels that exposes it to interest rate risks. Any increase in rates may make BEP a bit less profitable by increasing its costs.
  • Economic Slowdown: Economic slowdown might limit the expansion of existing projects and could mean more difficult future acquisitions.
  • Uncertainty in government policies: Government subsidies may be terminated or have reduced influence, making BEP less attractive as an investment.

Management’s Perspective Management acknowledges the challenges posed by inflation and economic instability, but they remain very bullish regarding its future, since renewable energy will have more long-term demand. Brookfield is very keen on investing in operations that have a good moat, rather than the latest shiny projects. They want a stable, low risk business, and are willing to wait for the correct opportunities to enter into a market rather than making impulsive acquisitions. BEP is trying to use strategic acquisitions and organic growth to boost profits, reduce costs, and increase long-term value. It is trying to shift to a company that creates value over the long run. The management also acknowledged that while the net income is important, the quality and stability of cash flows are way more important for them.

Moat Rating: 3/5

  • BEP has a medium moat. It has some good competitive advantages with scale, distribution and expertise in operations, but some risks include heavy reliance on long-term, fixed-price contracts, which can be unprofitable if inflation is greater than projected. It also faces challenges posed by new disruptive technologies, which can put a lid on their moat. Also, it lacks the pricing power of many of its peers. Even then, a diversified portfolio, access to low cost funding, and a global presence provide it with some unique strengths that allows it to be more protected than others.

Understandability: 3/5

  • Although the basic concept of renewable energy is relatively easy to understand, BEP’s complex partnership structure, and the intricacies of financial valuations associated with different markets and contracts can be confusing for an average investor. Furthermore, the sheer size of the company and the spread of its operations add an additional layer of complexity.

Balance Sheet Health: 4/5

  • Brookfield Renewable’s balance sheet is stable with a good portion of debt financing. Though high levels of debt may be seen by others as risky, BEP’s strong and reliable cash flows ensure that the debt is easily serviceable, and also allow the company to take advantage of further acquisitions in the future. The debt is long-term and there are no indications that they will face any financial issues in the near-term.