Last year was an exceptional one for Brookfield Renewable Partners (BEP 1.63%). The renewable power company generated $581 million in funds from operations (FFO), which was up more than 30% from 2016. Because of that, the company was able to raise its already high-yielding distribution by another 5% so that it now yields about 6.4%.
However, as good as last year was, the future looks even brighter. Some evidence of that is Brookfield Renewable Partners' view that it can grow FFO at the high end of its 5% to 9% annual targeted growth rate for the distribution over the next five years, implying the potential for similar high-end increases in the payout over that timeframe. One of the things powering that confident outlook is the company's operational prowess, which was on full display in the first quarter.
Digging into the results
Brookfield Renewable started 2018 off with a bang by generating $193 million ($0.62 per unit) in FFO, which was up 13% year over year. Powering those strong results was growth across the company's renewable energy portfolio:
Data source: Brookfield Renewable Partners. Chart by the author.
Brookfield's core hydroelectric business generated excellent results, with FFO up 9% year over year. Two factors drove that growth. First, its hydro assets produced 6% more power than the long-term average led by strong results in North America, which was 10% above average. Meanwhile, pricing improved due to inflationary increases on its contacts as well as from higher priced agreements in Brazil, where it realized 6% more for the energy it produced versus last year.
FFO in the wind segment jumped nearly 25% due in large part to its recent investments in TerraForm Power (TERP) and TerraForm Global. The company also benefited from new wind capacity in Europe that it brought online last year. These two factors helped overcome the fact that power generation across its legacy wind fleet was in line with 2017's level.
Brookfield generated $10 million in FFO from its solar investments last quarter, which was the first full one since it acquired stakes in TerraForm Power and TerraForm Global. Meanwhile, the company earned $5 million in FFO from its storage facilities, which benefited from an investment in First Hydro's pumped storage facilities in the U.K. as well as better pricing from its Bear Swamp facilities in New England.
Image source: Getty Images.
A look at what's ahead
While recent acquisitions helped boost Brookfield Renewable's bottom line in the first quarter, the company sees its organic expansion initiatives powering growth in the coming years. The company has several projects under way around the world that will add millions of dollars in FFO when they come online.
The hydropower business just recently commissioned a facility in Brazil, and it has more capacity under construction in the country. Those projects alone will add $14 million in annual FFO. Meanwhile, the wind business has several development projects under way in Ireland and Scotland, which will add another $6 million to the bottom line. Brookfield's solar platform, on the other hand, just signed a joint venture with the largest warehouse operator in China to develop rooftop solar on several of its logistical facilities in the country over the next three years. Finally, the company is moving forward with an upgrade of its Bear Swamp storage facility, which will boost capacity by 10% when it's complete in 2021.
In addition to the incremental cash flow from its internal expansion projects, the company should also benefit from its investment in TerraForm Power. The wind and solar company has several initiatives under way to increase cash flow, including recently agreeing to acquire a renewable energy platform in Europe. These actions position the company to raise its dividend at a 5% to 8% annual rate over the next five years.
Brookfield Renewable's embedded organic growth alone from those factors as well as from inflationary price increases on its contracts and further margin improvements position the company to grow FFO at about a 9% compound annual growth rate over the next five years. Because of that, the company could potentially accelerate the pace at which it increases the distribution from the 6% compound annual growth rate it has delivered since 2012 up to a 9% rate over the next five years. Meanwhile, there's the potential for further upside from rising power prices and acquisitions, both of which could be substantial contributors in the coming years.
A bright future awaits
Brookfield Renewable Partners' strong first-quarter results show that its strategy to create value is gaining steam. Because of that, it appears as if the company is about to hit the accelerator on its distribution growth rate given the outlook that it can expand FFO at the high end of its target range thanks to the embedded organic growth of its portfolio alone. That potential for a faster-growing, high-yield payout makes it an ideal stock for income-seeking investors to hold for the long haul.
