Brookfield Renewable Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Brookfield Renewable Corporation is a global renewable power platform, owning and operating a diverse portfolio of hydroelectric, wind, solar, and energy storage facilities, aiming to generate sustainable returns for its investors.

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.

Introduction and Business Overview: Brookfield Renewable Corporation (BEPC) operates a diversified portfolio of renewable power assets globally. This includes hydroelectric, wind, solar, and energy storage facilities. The core strategy is to leverage operational expertise and strong capital resources to acquire and develop assets that can generate long-term, stable cash flows, which translates into sustainable shareholder returns.

  • Revenue Generation: Revenue generation is achieved through long-term power purchase agreements (PPAs) with creditworthy counterparties, which provide a stable, recurring income stream. BEPC also generates some revenue from the sale of renewable energy certificates (RECs) which are credits that represent the environmental attributes of renewable energy production.
  • Industry Trends: The renewable energy sector is experiencing rapid growth due to a global shift towards decarbonization and growing concerns about climate change. This has led to governments setting ambitious renewable energy targets and providing incentives for the development and use of renewable power sources, as well as increasing cost competitiveness of renewables compared to traditional power sources, which provide a tailwind to BEPC. This growth and competition, in turn, are increasing pressure on margins.
  • Competitive Landscape: The competitive landscape is very concentrated among a small group of players with significant power generation capacity and economies of scale. Despite this, barriers to entry are quite high due to regulatory and licensing hurdles, and high infrastructure costs, which tend to protect the established players from new competitors. BEPC attempts to create a moat via its scale of operations and access to a large pool of capital.

What Makes BEPC Different:

  • Diversified Portfolio: BEPC’s portfolio is geographically diverse across North America, South America, Europe, and Asia, mitigating the risks associated with single market exposure. The diversification across multiple sources of renewable energy generation—hydroelectric, wind, solar, and energy storage—also creates resilience to fluctuating weather patterns or resource availability.
  • Scale and Expertise: BEPC has a significant scale advantage and vast experience in acquiring, developing, and operating renewable energy assets. This scale advantage also allows the company to leverage its long established relationships with leading developers, equipment manufactures, etc to get good deals for the company.
  • Long-Term Contracts: A considerable portion of the company’s revenue is secured through long-term power purchase agreements (PPAs). These contracts with government entities and creditworthy counterparties provide the company with stable and predictable cash flows which allows for the company to make informed investment decisions

  • Emphasis on Sustainability: BEPC focuses on sustainability in its business, which can create long-term brand equity, attract and retain customers and employees, and help the company reduce its regulatory and operational costs. Furthermore, this helps the company access new markets and investors who are seeking sustainable investment options.

  • Financial Analysis and Performance
  • Return on Invested Capital (ROIC): From 2018-2022, ROIC hovered around 10%, which is a little above the 8% average cost of capital for the sector. This means the company is generating excess returns on the capital it has invested.
  • Revenue Growth: Between 2018 and 2022, revenues have seen an average annual growth of roughly 17%, which seems impressive on paper but this is mainly driven by acquisitions, organic growth has been limited.
  • Profit Margins: EBITDA margins have varied from 55% to 65% in that same period.
  • Capital Structure: BEPC has a fairly conservative capital structure with debt-to-equity ratios between 1 and 1.5. This suggests that the company is able to finance its operations and capital investments while being relatively less leveraged.
  • Cash Flow Generation: Free cash flow has been consistently positive, and has been growing, which allows BEPC to invest in new opportunities, pay dividends, and reduce debt.

Moat Analysis:

BEPC’s moat is a complex structure with some elements of strength and some weaknesses. The company benefits from a few different factors, making its moat a 3 out of 5

  • Barriers to Entry: Regulatory hurdles and the high capital costs associated with building renewable energy assets can create a barrier to entry, which protects BEPC to some extent.
  • Scale: BEPC’s vast network of geographically diverse assets helps drive efficiency and reduce risks.
  • Long-Term Contracts: Long-term PPA’s provides stability of cash flows and income generation for the company.

These provide a narrow but durable moat. However:

  • Competition: Despite the above-mentioned moats, the competitive nature of the industry makes it difficult for one player to control the market. Other players also have great economies of scale and can also access favorable locations for renewables generation and can offer similar pricing as BEPC.
  • Technology Risk: Rapid technological advancements might render current renewable technologies obsolete, potentially hurting those reliant on existing ones.

Risks to the Moat:

  • Policy and Regulation: Political and regulatory risks like changing policy framework for renewables, trade policy, environmental policy or shifts in government preferences, as they could threaten BEPC’s competitiveness or investment plans.
  • Technological Disruption: Technological advancements in areas such as battery storage or other new forms of power generation can also render BEPC assets less competitive
  • Competition: Increased competition among other larger, well-financed renewable companies could lead to higher capital costs, lower power prices, and reduced return on invested capital.
  • Interest Rates: Higher interest rates would increase the company’s borrowing costs and could lead to reduced profitability and higher capital costs.
  • Geopolitical Risk: Volatility in international and emerging markets may lead to operational and financial losses.

Business Resilience: Despite above-mentioned threats, BEPC’s business is pretty resilient because of the following reasons:

  • Long-Term Contracts: The PPAs provide a steady cash flow stream and limits the risk of unexpected decline in the power prices.
  • Diversified Portfolio: Geographical and technological diversification leads to stable financial performance even in the face of fluctuating macro conditions.
  • Strong Financial Position: The balance sheet is relatively healthy, which gives the company the means to navigate a downturn in market conditions.

Understandability: BEPC’s business is quite complex and may need some background in finance and energy sectors to fully understand it. While the nature of renewable assets is simple enough to understand, the company has large scale operations across different parts of the world and uses different financial derivatives and instruments, which is difficult for the average investor to comprehend. Therefore, the understandability rating is 3 out of 5.

Balance Sheet Health: The balance sheet seems pretty good at first glance but the company carries a large amount of liabilities.

  • Leverage: The debt-to-equity ratio is between 1 and 1.5, which means the company relies on both debt and equity to fund its operations and has a moderate leverage profile.
  • Liquidity: Current assets such as cash and equivalents are able to cover most short term obligations, while the company has sufficient credit to service long-term financial obligations.
  • Assets: BEPC’s assets are primarily long-lived energy assets that provide stable cashflows and are valuable in the long-term.

Because of all of these, its balance sheet health is rated a 4 out of 5.

Recent Controversies/Concerns

  • Credit downgrade at BBB: Recently, some analysts have pointed out that the company might be downgraded to below investment grade due to higher debt load, but the management has noted they will keep debt-to-equity ratios around the industry average and are targeting higher profits and ROIC to mitigate this.
  • Rising competition for renewables: The high return in renewables sector has meant more companies are entering the sector to compete with established players, but given the massive need for green energy, this is unlikely to be detrimental to the company in the long term. Also, the company is actively developing new technologies to stay at the forefront.
  • Changing Macro Conditions: Like all publically traded companies, BEPC’s stock price has also fluctuated a lot, depending on the broader economic environment and market sentiments.
  • Cost overruns: The company has often faced cost overruns with their projects. This is a risk inherent with any large-scale projects especially in the present climate of changing commodity prices, higher labor costs, etc, but they have put in measures in place to reduce risk from such situations.