Brookfield Renewable (BEPC -0.09%) (BEP) is a global leader in renewable energy. It operates a diversified portfolio across technology (hydro, wind, solar, and energy transition) and geography (North and South America, Europe, and Asia).
The company has invested heavily in expanding its portfolio over the years, especially to grow its wind and solar energy platforms. However, Brookfield doesn't want investors to overlook the importance of its hydroelectric business. CEO Connor Teskey highlighted that business in his recent fourth-quarter letter to investors.
Image source: Getty Images.
A powerful base business
Brookfield operates 222 hydroelectric power generating facilities across 83 river systems with the capacity to produce 8 gigawatts (GW) of power. That's enough to power between 6 million and 8 million homes for a year. These assets currently supply 49% of Brookfield's annual cash flows.
While Brookfield's focus has been on growing its solar energy and wind platforms in recent years, CEO Connor Teskey doesn't want investors to forget about its hydro assets. He wrote:
We continue to believe hydropower is the premier renewable technology due to its perpetual nature and dispatchability. And while the asset classes of wind and solar are certainly growing faster, the benefits of hydro are rapidly increasing in today's market environment. As decarbonization continues to drive additional demand for carbon-free baseload generation, our scale hydroelectric portfolio will continue to be a meaningful differentiator for our business and positions us as a partner of choice to support governments and companies in achieving their carbon reduction goals. Further, the dispatchable or embedded storage benefits of hydro are becoming increasingly beneficial as more intermittent renewables are added to the grid.
Hydro is essential to providing the power grid with steady emissions-free energy. That gives it a leg up on wind and solar, which can't provide baseload power because the wind doesn't constantly blow, and the sun isn't always shining. As a result, wind and solar energy require battery storage as a backup, which is still relatively expensive. On the other hand, emissions-free hydro is comparatively inexpensive, making it a great power source.
An increasingly valuable asset
Given the stability hydroelectric power provides, it's becoming more valuable as the economy races to decarbonize. That's enabling Brookfield to capture higher power rates. For example, Teskey highlighted that the company recently signed a 40-year power purchase agreement with Canada's largest electricity producer for its 265-megawatt (MW) Lievre facilities in the country. He pointed out that "the contract represents an attractive premium to the prices the facility has historically achieved, generating an additional $20 million of revenue per annum."
Furthermore, the higher future cash flows significantly increased the value of these assets. Brookfield was thus able to layer on an additional $1 billion Canadian ($780 million) of 40-year investment-grade debt at an attractive rate. The company can redeploy those funds into its growth initiatives, which should generate more than $100 million of incremental annual income. Teskey noted, "said differently, through the recontracting and upfinancing of a single hydro asset, we can fund the majority of our targeted 2022 equity deployment at exceptionally attractive rates." He pointed out that the company has more than 5.5 GW of power generation coming up for renewal over the next five years. With hydropower prices rising, it expects to lock in higher income and layer in new funding to drive additional growth.
While there are fewer hydropower growth opportunities compared to wind and solar, Brookfield is finding attractive ways to invest in the sector. Teskey noted that the company's Colombian business recently acquired seven hydroelectric plants with nearly 150 MW of capacity for $425 million. These assets are highly complementary to its existing portfolio, which should drive cost savings. Meanwhile, Brookfield is pursuing 2.6 GW of hydroelectric development opportunities worldwide to drive future growth.
An important power source
Brookfield Renewable has invested a lot of money to grow its wind and solar energy platforms in recent years. However, the company doesn't want investors to overlook its legacy hydroelectric business. While it won't grow as fast, it's an essential piece of its business. It's benefiting from higher rates and values, the latter of which will provide Brookfield with additional funding to expand its faster-growing platforms. That will enhance its ability to create value for shareholders in the future, making it stand out as a top renewable energy stock for the long term.
