Earlier this month I blogged about my plan to help make this world a greener place by supporting renewable energy initiatives. One way to do this profitably is to invest in green companies. On Thursday this past week I purchased 50 shares of Brookfield Renewable Energy, (BEP.UN) for $38.05 CAD each for a total cost of roughly $1,900. It also trades as BEP on the New York Stock Exchange for interested investors in the U.S.
This is my first investment in a pure-play renewable energy company. Brookfield Renewable develops, owns, and operates renewable power generation facilities. It’s one of the largest and most diversified publicly traded green companies in the world. BEP has a diversified portfolio of high quality assets and over 100 years of power generating history. 🙂
The Business of Brookfield Renewable Energy
I’ve always like the idea of investing in B.C. Hydro or Ontario Hydro because the idea of creating electricity through the power of nature itself (water and gravity) and then selling that electricity to make money sounds like a great business model. The profit margin must be very profitable because once a hydro dam is built it doesn’t cost much to maintain it. But there’s no practical way for me to invest in crown corporations and government operated hydro facilities. Luckily, Brookfield Renewable has the solution. 🙂
BEP has over 7,000 MW of installed capacity, predominantly from its large hydroelectric portfolio. This means I can invest in water dams via BEP. 🙂 80% of the company’s assets is hydro projects, the highest quality renewable asset class. The other 20% is split between solar farms and wind farms with a compelling total return profile. In total Brookfield Renewable has $20 billion of assets under management (AUM,) mostly in North America, as the map below shows.
But ultimately what I really want to know is will this company be profitable in the future. First let’s look at its historical returns. Thanks to the experienced management team at the Brookfield Asset Management company (BAM), the parent company of Brookfield Renewable, BEP was able to return to its investors 16% compounded annualized return since inception in 1999. Hey not bad at all! 😀 It outperformed both the Canadian and U.S. stock market indexes.
But past performance doesn’t also reflect future gains so let’s take a look at what management plans to do with the company going forward. BEP’s main objective is to deliver long-term gross returns of 12% to 15% on a portfolio basis. The company says it seeks to keep a distribution growth target of 5% to 9% a year and a payout ratio of 65%. Currently BEP.UN pays a 5.5% dividend. Since it’s in my TFSA I don’t expect to pay too much tax on the distribution. We also know from its website that Brookfield Renewable deals largely with cash flow contracts. This means its customers are obligated to buy electricity from BEP at a predetermined price for a set number of years. The weighted average of these agreements is 18 years. This takes a lot of risk out of current and future revenue fluctuations. 🙂
As with all renewable energy companies BEP faces resource risk. Climate change could alter landscapes, change wind patterns, and dry up rivers and lakes in the future. A financial world of rising interest rates can also be a concern since BEP does use leverage and borrow money to finance its projects.
Given the strong track record of the management team, and the increasing demand for green energy the pros of investing in BEP outweigh the potential risks. With a portfolio of high-quality assets, strong growth opportunities and a significant pipeline of development projects, I believe Brookfield Renewable Energy is positioned to produce attractive long-term total returns with growing cash flows and distributions to shareholders, exactly what I want for my buy-it-and-forget-it retirement portfolio. 😀
In case anyone is interested in further reading about BEP here is its latest investor presentation
[Edit] I bought 29 more shares of BEP.UN for $36 each on July 28th 2015. This is to hold enough units for the DRIP. [/Edit]
Random Useless Fact