Brookfield Renewable (BEPC 0.09%) (BEP 0.19%) operates one of the world's largest renewable power platforms. It has more than 31 gigawatts (GWs) of capacity. That's enough clean power to offset the carbon emissions of a country the size of France.
The company's extensive clean power portfolio generates lots of free cash flow ($840 million in funds from operations (FFO) through the third quarter of last year). That gives it money to pay an attractive dividend (currently yielding 4.8%) and invest in its continued growth. What might come as a surprise in a time when the wind and sun are the dominant producers of renewable energy is that 60% of its earnings come from hydropower.
Built on a legacy of hydro
Brookfield Renewable has a globally diversified portfolio of renewable energy assets. It owns hydro, wind energy, utility-scale solar, distributed energy (e.g., rooftop solar), and sustainable solutions across North America, South America, Asia, and Europe. However, while it's very diversified, hydroelectric is its biggest moneymaker:
Data source: Brookfield Renewable. Chart by the author.
Hydro assets provide Brookfield Renewable with 54% of its revenue and nearly 61% of its total FFO (47% after stripping out the money-losing sustainable solutions segment). That's 85% higher than the contribution from its wind energy assets. What's noteworthy is that Brookfield's current wind energy capacity of 7.2GW is only slightly lower than its hydroelectric capacity (8.2GW). Hydro can generate more cash flow from a lower installed capacity base because it's not an intermittent power source like wind.
The company has a long legacy in the hydroelectric sector. Its parent, Brookfield Corporation, has more than 100 years of experience owning, operating, and developing hydroelectric power plants. Brookfield Corporation originally formed its renewable energy affiliate in 2011, merging its renewable power assets with those of its renewable power fund. At the time, 86% of its capacity (3.9GW) was hydroelectric.
Hydro might not stay on top
While hydropower has supplied Brookfield Renewable with the majority of its earnings since its formation more than a decade ago, that could change in the coming years. The company currently has a massive 143GW backlog of expansion projects in various stages of development. That backlog runs the gamut to include new wind, solar, and energy storage projects and sustainable solutions development projects like carbon capture and storage, renewable natural gas, material recycling, solar panel manufacturing, and green ammonia.
However, there isn't a single hydroelectric project in its backlog. The company finished its last hydroelectric project during the second quarter of 2022. The Brazil hydro project added 30 megawatts of capacity and $5 million in annual FFO.
Because of that, its earnings from its other segments will grow faster than hydro in the future. Its current slate under construction, construction-ready, and advanced-stage projects would add $245 million in annual FFO over the next few years. On top of that, the company has closed several acquisitions over the past few months. Those deals will increase its wind and solar earnings. In addition, they'll add nuclear service earnings from its investment in Westinghouse.
However, that doesn't mean the company won't make new hydropower investments in the future. Brookfield has continued to grow its hydropower business over the years. It has acquired several hydro facilities since its formation in 2011. Meanwhile, in 2019, it invested 750 million Canadian dollars ($557 million) in TransAlta. It received exchangeable securities convertible into equity ownership in that company's hydro assets. Starting next year, the company can exchange those securities for up to a 49% interest in TransAlta's hydro assets. The company will likely continue to invest in hydro facilities as it finds compelling opportunities.
Slowing switching power sources
Hydropower supplies Brookfield with steady cash flow, giving it a very solid foundation to support its high-yielding dividend. However, the global transition to lower-carbon energy has opened up many more opportunities to invest in other renewable technologies and sustainable solutions. Because of that, hydro likely won't be a growth driver for the company in the future. Instead, it plans to tap into those other sources, which could give it the fuel to grow its FFO per share by more than 10% annually (supporting 5% to 9% annual dividend growth). So, while Brookfield's hydropower business is losing ground, its cash flow won't dry up.
