Brookfield Renewable Is Well Positioned To Take Advantage of Current M&A Environment

Equity Analyst

Brett Castelli

Brookfield Renewable holds a well-diversified global portfolio of clean energy technologies assets. The company targets 12%-15% returns via a combination of organic growth and mergers and acquisitions. Brookfield takes a primarily contrarian approach to M&A.

Brookfield Renewable’s portfolio has historically been heavily weighted toward hydro generation, but that has changed in recent years given outsize growth in wind and solar. Hydro has decreased from approximately 80%-85% of the company five years ago to approximately 50% today. We expect hydro to continue to decline as a percentage of cash flow over time, given relatively limited growth opportunities when compared with wind and solar. Solar has increased to 15%-20% of the portfolio as of 2022 and management has outlined robust growth plans expecting it to be the largest energy source in the long term.

In addition to renewable energy assets, Brookfield Renewable expanded its investment scope in 2022 to include broader energy transition asset classes. These include novel areas such as carbon capture as well as traditional fossil fuel and nuclear power generation.

Brookfield Renewable’s geographic focus has historically been on North America and Latin America, but has also expanded in recent years to Europe and Asia. We expect the company to take a largely agnostic view toward geographies, opting to invest where the most attractive risk-adjusted returns are. However, the company has communicated it expects roughly 75% of its portfolio to be in developed markets with the remaining 25% in developing markets over the long term, in order to manage foreign exchange risks. 

Brookfield Renewable primarily invests in assets alongside Brookfield Asset Management’s private equity funds. This approach brings the benefit of increased scale, allowing the company to pursue larger opportunities, but results in frequent acquisitions and disposals. Management seeks to add value through aggressive cost and revenue optimization. The company was historically primarily an acquirer of operating assets, but has added development capabilities in recent years.

Business Strategy & Outlook

We do not award Brookfield Renewable an economic moat rating. We attribute much of Brookfield’s ability to earn excess returns to its strong capital allocation track record and not an underlying moat source. 

Brookfield Renewable employs an unusual structure in which it invests in assets alongside institutional investors via Brookfield private equity funds. This results in much of Brookfield Renewable’s growth being tied to mergers and acquisitions as opposed to organic growth. 

Development of renewable energy assets can be characterized by fierce competition and thin returns above cost of capital. Potential moat sources include intangible assets via long-term contracts and scale advantages, but are reserved for a select few companies, in our view. The industry enjoyed robust returns in its early days as competition was sparse and subsidies were high. However, recent years have seen sharply increased competition and compressed returns. This is coupled with limited barriers to entry--particularly for onshore renewables such as wind and solar--where the average project size and complexity is much smaller than traditional thermal plants. 

Brookfield’s renewable legacy is centered on its hard-to-replicate hydro assets (approximately 50% of 2022 cash flow). We believe hydropower plants have attractive moat characteristics, given their long useful lives of about 100 years, relatively low operating costs, and dispatch capabilities in the case of pumped hydro. In addition, new hydro assets are extremely difficult to build given needed regulatory approvals and locational constraints, supporting an efficient scale moat source. We particularly view this as the case for Brookfield’s North American hydro portfolio, which comprises a majority of its hydro capacity and is concentrated in the Northeast United States. Hydro’s favorable characteristics are partially offset by greater year-to-year resource variability than wind or solar. 

We do not believe Brookfield’s wind segment, which was about 23% of 2022 cash flow, possesses an economic moat. The company has 5.4 gigawatts of assets globally, which we do not view as large enough scale to demonstrate a cost advantage. For comparison, narrow-moat Nextera has 20 gigawatts of wind capacity in the U.S. alone. Brookfield’s wind portfolio does benefit from intangible assets in the form of contracts with counterparties for approximately 90% of generation in 2022, declining to 80% by 2026. This level of contract coverage should ensure consistent returns for Brookfield’s wind portfolio in the near term, but falls short of garnering a narrow-moat rating, in our view.

We do not believe Brookfield’s solar and energy transition segments warrant an economic moat. Brookfield is a relatively new entrant into the solar market, where we see fewer barriers to entry relative to wind given simple construction and smaller project sizes. 

Brookfield’s reliance on M&A coupled with our expectation for hydro, its moatiest segment, to decline as a percentage of cash flow over time results in our no-moat rating.

None

Economic Moat

Brookfield Renewable Partners

Brookfield Renewable Partners LP engages in owning a portfolio of renewable power generating facilities primarily in North America, Colombia, Brazil, Europe, India, and China.. It operates through following segments: Hydroelectric, Wind, Solar, Energy Transition, and Corporate. The Energy Transition segment distributes generation, pumped storage, cogeneration, and biomass. The company was founded on June 27, 2011 and is headquartered in Hamilton, Bermuda.

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Brookfield Renewable Partners LP engages in the ownership of a portfolio of renewable power and sustainable solution assets. It operates through the following segments: Hydroelectric, Wind, Utility-Scale Solar, Distributed Energy and Sustainable Solutions, and Corporate. The Distributed Energy and Sustainable Solutions segment includes distributed generation, pumped storage, renewable natural gas, carbon capture and storage, recycling, and cogeneration and biomass. The company was founded on June 27, 2011 and is headquartered in Hamilton, Bermuda.

We had a neutral opinion on Brookfield Renewable shares the last time we covered it. The stock looks increasingly expensive on the most important measures.

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BROOKFIELD, News, April 05, 2022 (GLOBE NEWSWIRE) -- Brookfield Renewable Partners L.P. (TSX: BEP.UN; NYSE: BEP) today announced that it intends to redeem all of its outstanding Class A Preferred Limited Partnership Units, Series 11 (the “Series 11 Preferred Units”) (TSX: BEP.PR.K) for cash on April 30, 2022. The redemption price for each Series 11 Preferred Unit will be C$25.00. Holders of Series 11 Preferred Units of record as of April 14, 2022 will receive the previously declared final quarterly distribution of C$0.3125 per Series 11 Preferred Unit.

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