May 6, 2022
Brookfield Renewable Partners L.P.
Good execution, and a great environment to deploy capital
Our view: Although Q1/22 results were slightly weaker than expected due to an unfavourable generation mix, we believe BEP will start to benefit from higher merchant power prices. We believe that the volatile markets could lead to additional M&A opportunities. We continue to see BEP as a core holding in the renewable energy sector, generating predicable cash flows from its diversified global portfolio.
Key points:
Operating business positively leveraged to inflation, and project developments are successfully navigating through supply chain constraints. Management continues to see inflationary pressures as a net tailwind for BEP's operations. About 70% of its contracts are indexed to inflation, and the business has a largely fixed cost structure with relatively limited exposure to rising labour costs or increasing maintenance capital expenditures. With respect to project developments, BEP locks in the cost of major components when they sign PPAs, and have strong relationships with equipment suppliers. Management is “very confident” they can commission ~9 GW (gross) of renewable facilities in the 2022-24 period, and see upside as they continue to advance their development pipeline.
Higher power prices should start flowing through to FFO. Due to the contracted nature of the company's portfolio, BEP experienced limited upside from elevated merchant power prices. However, some of its short- term hydro contracts will be maturing, supporting higher cash flows in H2/22. Over the next five years, the company has the ability to recontract almost 5.5 GWh of generation in North America, which would contribute an incremental $120 million of FFO annually using current market prices. The incremental FFO would also free up additional financing capacity for future growth.
Volatile markets could lead to more opportunities. Brookfield Renewable has a strong track record of deploying capital at attractive returns, particularly during times of market dislocation. The company has almost $4 billion of total available liquidity. Year-to-date, the company has closed or agreed to invest over $1.6 billion (~$340 million net to BEP), which is consistent with management's annual target of deploying $1.0-1.2 billion per year. Management continues to expect return on capital deployed to meet or exceed its 12-15% target.
Our financial forecast is largely unchanged. We have decreased our 2022 FFO/unit estimate to $1.61 (from $1.69), mainly to reflect the weaker-than- expected Q1/22 results and higher management fees. Our 2023/24/25 FFO/unit estimates are unchanged