Renewable energy could reduce emissions but also create jobs and improve public health. − Paul Polman
Renewable energy is likely to be one of the key drivers of economic recovery in the post-COVID-19 world, and the recently listed Brookfield Renewable Corporation (BEPC) has just landed in the middle of a sweet spot. BEPC is into generating hydroelectric, wind, and solar power around the globe, and its future looks sunny and green.
BEPC recently acquired TerraForm Power (TERP) and the combined company is one of the largest renewable power companies in the world. It is likely to outperform in the long run, and here are the reasons why:
Image Source: BEPC’s SEC Filing
As per June 30, 2020 data, BEPC and TERP together generate more than 18,000 megawatts of power around the globe. About 66% of the company’s revenues are currently generated from the hydroelectric power business, while wind and solar power businesses contribute 27% and 7%, respectively. In the U.S., BEPC focuses on short-term hydroelectric power contracts because of the low power price, while in South America it works on longer-term contracts. In Q2 2020, the company bagged 17 hydroelectric power contracts in South America, totaling over 430 gigawatt-hours per year.
The cost of installing a solar power plant has fallen from $4 per watt to less than $1 per watt around the world. As capital costs are falling, governments have started reducing subsidies, which is working in the company’s favor. In Q2 2020, the company commissioned solar projects of 100 megawatts and signed five long-term power purchase agreements with investment-grade-rated clients. The company stays away from highly competitive, low-return projects and focuses instead on niche, well-paying projects.
Having gained rich expertise in all major renewable power technologies, BEPC’s management team has decided to focus more on solar power. It estimates that its solar energy portfolio will outshine its other renewable energy sources portfolio in the next decade. That said, the company’s core long-term goal is to build resilience by diversifying business in a way that it doesn’t have to majorly depend on any particular resource, client, or market. It promises to be nimble and swift, depending upon which direction the wind blows.
Financials and Dividend
As of June 30, 2020, BEPC has access to $3.4 billion total liquidity including its balance sheet cash of $147 million. The company estimates this liquidity is sufficient dry powder to take advantage of opportunistic investments.
BEPC owns $20.7 billion (at cost) worth of power assets financed by accruals and long-term debt of approximately $5 billion as of June 30, 2020. The company’s revenues averaged $800 million per quarter in Q3 and Q4 2019, both pre-COVD-19 quarters. In Q2 2020, its revenues were $474 million. Despite COVID-19 impacting its Q2 2020 operations, BEPC managed to generate $243 million in operating cash. I estimate that the company will do way better once the virus is contained because of all the new orders and assets it has acquired.
Image Source: Seeking Alpha
BEPC’s target dividend payout ratio is 70% of Funds From Operations (FFO). Its dividend payout in 2020 is estimated at $1.74, which translates to a dividend yield of 2.91% based on its market price of $59.71 as of October 1, 2020. Considering that BEPC is a growth company, the dividend yield looks very attractive.
I am bullish on BEPC in the long term. A change of guard at the White House in November will help the stock because Biden seems to be a big fan of renewable energy, and oil producers are already considering him as a threat. If the Republicans win, it will be business as usual. Either way, BEPC wins.
Image Source: My tweet referring to a green-power-related post in The Lead-Lag Report
The company has got many positives going for it:
1. The renewable energy sector is likely to get a tremendous boost in the post-COVID-19 age.
2. The company is well-positioned to take advantage of the growing business because it has operations around the globe and is backed by 25 years of experience and performance.
3. BEPC has a strong balance sheet, and its revenues are all set to jump after the virus is contained.
4. It has adequate liquidity to take advantage of distressed asset sales.
5. It focuses on niche, high-margin projects and does not chase highly competitive, low-margin projects.
6. It looks like a safe growth and dividend play.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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