February 6, 2022
Brookfield Renewable Partners L.P.
Positive momentum heading into the new year
Our view: Management has been executing well, agreeing to deploy $1.1 billion of capital (net to BEP) in the past year, capturing higher power prices in new contracts and growing their development pipeline. With the general decline in renewable valuations, and BEP's ability to better navigate the supply chain and inflationary pressures, we believe BEP is in a strong position to increase the capital deployed in 2022. We continue to view BEP as a core renewable energy holding, but are maintaining our Sector Perform rating due to the relative valuation to its peers.
Key points:
Inflationary pressures are a net positive. BEP's operating assets are positively levered to inflation, with 70% of contracts indexed to inflation. We also expect the company to gradually capture upside in power prices as they roll forward and recontract assets over time (e.g., Lievre recontracting). On the development side, BEP is able to navigate through the supply chain and inflationary headwinds much better than smaller developers due to BEP's scale, centralized procurement function, and strong relationship with Tier 1 suppliers. BEP also limits basis risk and the variability in project economics by locking in major equipment components at the same time PPAs are signed. Management has seen offtakers willing to accept higher PPA prices to reflect higher project costs as they prioritize the decarbonization of their footprint.
Seeing lots of growth opportunities. The company has been actively acquiring operating and development assets and platforms. Management indicated that they are seeing more operating assets as potential targets, particularly after the downdraft in the renewable sector in the past year. On the development side, BEP has commissioned 952 MW (262 MW net) of generation capacity in 2021, and management expects to commission over 9,000 MW (gross) over the next three years. We are confident that management will meet or exceed their target of deploying $1.0-1.2 billion of equity capital each year (deployed $1.1 billion in 2021).
Significant liquidity to finance growth under self-funding model. BEP currently has $4.1 billion of total available liquidity, providing financial flexibility to pursue larger transactions. The company also has additional "upfinancing" opportunities to free up capital (refinance and distribute cash to parent) at some of the company's hydro assets. Management reiterated its self-funding business model, which we see as an advantage in a market where peers may have difficulties raising common equity given the slump in share prices over the past year.
Tweaking forecast higher. We adjusted our 2022/23/24/25 FFO/unit forecast to $1.69, $1.78, $1.94, and $2.11, respectively (from $1.62, $1.75, $1.92, and $2.09, respectively). The adjustments to our forecast primarily reflect the recently completed acquisitions, lower management fees (lower unit/share price), offset partially by higher interest expense (higher debt levels related to C$1 billion hydro debt upfinancing). Please see Exhibit 2 for our revised financial forecast.