Brookfield Renewable Partners (BEP 4.19%) already has enough embedded growth in its existing renewable energy portfolio to increase its 5.5%-yielding payout at a 5% to 9% annual pace for the next five years. However, having that fully charged growth engine hasn't stopped the company from adding new power sources.
The company recently did just that by forming a joint venture with private equity giant KKR (KKR -0.94%) to own fast-growing Spanish solar company X-Elio. That deal will not only enhance Brookfield Renewable's solar platform but add a high-powered growth engine to its portfolio.
Details on the deal
Brookfield Renewable, along with the institutional partners of parent Brookfield Asset Management (BN 0.37%), is forming a 50-50 joint venture with KKR for X-Elio. As part of the deal, the Brookfield Renewable consortium will acquire a 20% stake in X-Elio from a third party as well as 30% of KKR's stake for a total commitment of about $500 million.
X-Elio currently operates 273 megawatts (MW) of solar capacity. In addition, it has another 1,413 MW under construction and a further 4,800 MW in its development pipeline in top solar markets such as Spain, the U.S., Mexico, Chile, and Japan. The addition of X-Elio will significantly boost Brookfield's solar platform, which consisted of 1,800 MW of capacity or about 4% of its total portfolio.
In commenting on the deal, Brookfield Renewable CEO Sachin Shah stated, "This is a unique opportunity to invest in a high-quality portfolio of operating assets including a near-term pipeline of construction assets with an experienced management team, integrated development platform, and best-in-class contracting capabilities. This investment allows us to grow our solar capabilities to include global solar development and offers another meaningful growth lever for our business."
Rapidly adding more power to its growth engine
Brookfield Renewable Partners already had a fully charged growth engine before joining forces with KKR to own X-Elio. The company estimates that its existing portfolio of renewable assets can increase their earnings by a 3% to 6% annual rate over the next five years through a combination of cost reduction initiatives and higher power prices. On top of that, Brookfield Renewable is targeting to build 1,000 MW of new projects, which should boost its bottom line by another 3% to 5% annually.
However, Brookfield Renewable has the financial capacity to invest $700 million per year in outside growth opportunities, which would power a faster growth rate. The company already secured one deal this year by signing a creative financing agreement with Canadian utility TransAlta (TAC 1.11%). The company is pumping 750 million Canadian dollars ($572 million) into TransAlta (CA$350 million, or $267 million, of which already closed with the balance payable next October) to help it become 100% powered by clean energy by 2025. In exchange, Brookfield Renewable will eventually own a direct stake in TransAlta's hydroelectric assets.
Meanwhile, the company is already working on its next deal. According to a report by Bloomberg, Brookfield Asset Management is one of several companies weighing a bid for a package of hydroelectric assets in Spain and Portugal. That deal could be worth as much as $2.3 billion, with Brookfield Renewable likely coming on board as a minority investor. If Brookfield Renewable successfully secures this deal or others like it, it will enable the company to grow at an even faster pace in the coming years.
An even more powerful growth engine
Brookfield Renewable Partners doesn't need any outside help to generate healthy growth for its investors. However, that's not stopping the company from enhancing its growth prospects by pursuing needle-moving opportunities. That's certainly the case with the X-Elio joint venture, which will not only bolster its solar operations but add another meaningful power source to help drive faster growth in its cash flow. That could enable Brookfield Renewable to increase its above-average dividend at or above the top end of its target range.