Brookfield Renewable Partners (BEP 0.92%) has a knack for buying high-quality renewable power assets for excellent prices, which has enabled the company to deliver steady growth for investors. Since 2012, the company has spent $3 billion in acquiring renewable assets around the world, which has powered 6% compound annual distribution growth. That trend doesn't appear as it if will come to an end anytime soon since the company recently spent several hundred million dollars to increase its stake in fellow renewable power company TerraForm Power (TERP).
A needle-moving deal for all involved
Brookfield, along with its institutional partners, recently agreed to inject $650 million into TerraForm Power to help the company complete the acquisition of Saeta Yield, which owns a portfolio of wind and solar assets in Spain, Portugal, and Uraguay. That transaction boosted the Brookfield-led partnership's interest in TerraForm Power from 51% to 65%. Brookfield's total commitment in this round was $420 million, which will increase its stake in TerraForm to 30%. It's a needle-moving investment for Brookfield as it will add an incremental $80 million to its annual funds from operations (FFO), which is sizable for a company that generated $581 million in FFO last year.
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In addition to boosting cash flow, this transaction will also increase Brookfield Renewable's exposure to the fast-growing wind and solar sectors of the renewables market, which will complement its world-class hydropower business.
TerraForm Power, meanwhile, benefits from this transaction in two ways. First, the cash infusion will enable the company to close its acquisition of Saeta Yield, which is a needle-moving transaction in its own right. TerraForm is paying $1.2 billion for Saeta -- funded by this capital infusion and $550 million of available liquidity -- which will boost its renewable generating capacity by 40%. In addition to that, the structure of the transaction will accelerate TerraForm Power's ability to get its leverage ratio down to its target range of 4.0 to 5.0 times cash flow. Finally, the deal provides TerraForm with a platform to expand in Western Europe. Those factors set the stage for TerraForm to increase its dividend at a 5% to 8% annual rate for the next five years.
Bolstering an already strong outlook
Before boosting its stake in TerraForm Power, Brookfield Renewable was on pace to expand FFO at a 6% to 11% annual pace over the next several years thanks to the embedded growth of its legacy portfolio. About half of that growth will come from the pipeline of renewable projects it has under way, which mainly consist of a mix of hydro assets in Brazil and wind facilities in Europe. The company's growing cash flow stream from those expansion projects, as well as some initiatives Brookfield has under way to boost margins, positioned the company to increase its distribution at a 5% to 9% annual pace for the next few years.
However, with the expanded stake in TerraForm, it's increasingly likely that the company could deliver distribution growth at or above the high end of that range. Not only is the TerraForm deal highly accretive to Brookfield's FFO, but TerraForm's purchase of Saeta positions it to grow its dividend at a high rate over the next several years.
On top of that, Brookfield Renewable still has more than $1.4 billion of available liquidity after boosting its stake in TerraForm Power. That gives the company quite a large war chest to make additional acquisitions. The company believes it can acquire $600 million to $700 million of high-quality renewable assets per year at value-based pricing, which would help it grow cash flow at an even faster clip.
A very bright future for income investors
Brookfield Renewable Partners was already on pace to increase its 6.4%-yielding payout by a healthy rate for the next few years. However, by boosting its stake in the equally fast-growing TerraForm Power, the company is in the position to potentially increase its payout at, or even above the high end of its target range. That makes it an even more compelling income stock to consider buying right now.
