President Trump’s decision to withdraw the U.S. from the Paris Agreement on climate change has been perceived by many pundits as a blow to renewable energy. This is because the U.S. is the world’s largest economy and one of the largest consumers of electricity.
Nonetheless, it should not deter investors from investing in renewable energy utilities, of which the most appealing is Brookfield Renewable Partners L.P. (TSX:BEP.UN)(NYSE:BEP).
Now what?
Brookfield Renewable is one of the largest publicly listed pure-play renewable energy businesses possessing a diverse portfolio of clean-power-generating assets focused on hydroelectricity and operating in developed as well as emerging markets.
That emerging markets exposure, centered on Colombia and Brazil, will act as a powerful tailwind for earnings growth.
You see, there is a distinct link between GDP growth and increasing consumption of electricity. While those economies have been hit hard by the commodities slump, and, in the case of Brazil, by a range of corruption scandals, economic growth is expected to recover as commodity prices improve. That coupled with growing mining and manufacturing activity because of firmer commodity prices will trigger greater demand for electricity.
Furthermore, Brookfield Renewable’s electricity output has been declining because of its dependence on hydro-power generation and poor hydrology, notably in Latin America. There are, however, signs that this is improving, especially with the lessening impact of the El Niño weather pattern in Latin America.
In the first-quarter 2017 results, gigawatt hours generated grew by 16% year over year. While net income for that period declined by 66%, the drop can be attributed to increased depreciation expenses for the quarter because of the growth of its portfolio of power-generating assets.
Importantly, Brookfield Renewable remains focused on growing its portfolio. It ended the first quarter with an impressive US$1.5 billion in liquidity, which was a healthy 34% increase over a year earlier. That leaves it well positioned to continue seeking out acquisitions that will boost revenue over time.
Brookfield Renewable also conducted a series of transactions with its partners over the course of the quarter, which further boosted its power-generating capacity. These included acquiring additional installed capacity of 3,600 megawatts by participating in the purchase of a majority holding in TerraForm Power Inc. and entering an agreement to buy a ready-to-construct, 16-megawatt wind facility in Northern Ireland.
The global push to renewable forms of power generation will act as a powerful tailwind for Brookfield Renewable, regardless of Trump’s decision to pull out of the Paris Agreement.
Many governments, including those in its key markets of Brazil, Colombia, and Canada, remain committed to expanding the proportion of renewable electricity generated. Because coal-fired power is ranked among the world’s leading greenhouse gas emitters, the push to eliminate it from the global energy mix has considerable momentum.
So what?
An attractive aspect of investing in Brookfield Renewable is its juicy 6% yield, but there has been some concern among investors as to whether or not its distribution is sustainable. This is because its payout ratio is well in excess of 100% of net income as well as declining cash flows caused by lower power generation from its hydro facilities due to low water levels.
Nevertheless, the yield is sustainable because of the partnership’s move to boost revenues by growing its asset base, the waning impact of the El Niño weather system on water levels, and the fact that 91% of its cash flows are contracted.
Brookfield Renewable is an attractive investment which offers a solid yield and growth potential.
