Brookfield Renewable Partners' (BEP 2.85%) growth engine stalled out in the second quarter as its cash flow went in reverse due to lower rainfall levels in some areas, which impacted its ability to generate hydropower in those regions. However, while cash flow dipped in the quarter, the company's growth initiatives, when combined with the expansion opportunities it sees up ahead, should provide it with the power needed to generate a steadily growing cash flow stream in the years to come.
A look at the numbers
|
Metric |
Q2 2018 |
Q2 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
$172 million |
$181 million |
(5%) |
|
|
FFO per unit |
$0.55 |
$0.61 |
(9.8%) |
Data source: Brookfield Renewable Partners.
As that table shows, FFO, which is a proxy for cash flow, dipped slightly overall in the second quarter, with a bigger decline on a per unit basis due to the recent sale of equity to fund its growth initiatives, including its investment in wind and solar company TerraForm Power (TERP).
Driving the decline was some weakness in its hydroelectric portfolio:
Data source: Brookfield Renewable Partners. Chart by author.
FFO from Brookfield's hydro portfolio declined 17% versus the year-ago period due to less rainfall this year in New York and Ontario, which caused it to generate less power from its plants in those regions. The company's facilities in South America, on the other hand, generated power close to the long-term average during the quarter. Meanwhile, the company brought a new hydro facility online in Brazil during the quarter, which should help boost FFO in the future.
Brookfield's wind business delivered a nearly 42% year over year increase in FFO during the quarter due mainly to acquisitions and recently completed development projects. One of the big drivers was the company's stake in TerraForm Power, which Brookfield boosted from 16% to 30% during the quarter. That investment should drive steady growth in the coming years as TerraForm improves its operations and captures new expansion opportunities.
The company's recently added solar business generated $16 million in FFO during the quarter thanks to its stake in TerraForm Power as well as its investment in TerraForm Global, which Brookfield helped take private last year. Finally, Brookfield's energy storage facilities contributed $7 million in FFO during the quarter, due in part to its investment in First Hydro's pumped storage facilities in the U.K. last year.
Image source: Getty Images.
A look at the outlook
Brookfield has several renewable energy projects under construction around the world. The company is building two hydro plants in Brazil, two wind farms in Europe, and expanding its storage facility in New England. As these projects come online over the next few years, they should generate an incremental $20 million of annual FFO. In addition to that, the company has several other projects in advanced stages of development that position it for additional growth in the future.
On top of those internally generated growth projects, Brookfield continues to pursue outside expansion opportunities. It should have an ample supply of both in the coming years given its current outlook. The company stated in its quarterly letter to investors that "we are in the early stages of a transformation of the global power grid, moving from fossil fuels to renewables" and that "this will require significant investment over multiple decades." In the company's estimation, the investment required to replace "the non-renewable capacity in our core markets with wind and solar" is more than $10 trillion. Because of that, Brookfield firmly believes that the "opportunity to invest and grow our business should be substantial for many decades."
A renewable income stock for the long-term
While Brookfield's cash flow went in reverse during the second quarter, the long-term trend is that FFO should grow at a steady pace for years to come as the company expands its portfolio. It sees a multi-decade opportunity ahead of it, which positions it to continue increasing its 6.4%-yielding payout at a steady pace. Those factors are among the many that make it a top renewable stock to buy for the long haul.
