Brookfield Renewable Partners: Growing Value Stock Worth Considering After Q1 2024 (BEP)

In March this year, I issued a bullish thesis on Brookfield Renewable Partners L.P. Limited Partnership Units (NYSE:BEP), which, since then, has generated ~13% in total returns, while the S&P 500 is down by ~2%.

There were four elements, which raised my interest in BEP and substantiated the decision to turn bullish:

1. Depressed share price, where starting from the moment, when the Fed initiated its restrictive cycle, BEP had lost more than 40% of its market cap despite the fact that the underlying cash flows have kept growing.
2. Strong advance stage pipeline, which, as of Q4, 2023, was 25% pre-funded and under a construction period.
3. Huge exposure to CPI component as circa 70% of BEP’s top-line is structured so that it allows the Fund to each year match the sales growth with inflation dynamics.
4. Fortress balance sheet at BBB+ level and a weighted average cost of financing of only 4.4%, which in the context of very distant debt maturities could be easily considered rather enticing and supportive of FFO generation over the foreseeable future.

Now, once the share price is up and the Q1, 2024 data is out, let’s take another look at BEP’s fundamentals to determine whether after the recent share price run-up the Fund is still an attractive investment choice.

Thesis review

By looking at the Q1, 2024 earnings results, one should not be surprised of why the market has sent the stock price higher.

During the quarter, BEP generated FFO of $296 million, or $0.45 per unit (or share), that implies an uptick of 8% relative to the same quarter in the prior year. There were multiple drivers behind this, but the main ones were the following:

• Better than average hydro output.
• Some new development projects finally coming online with already signed PPAs in place.
• CPI escalators.

Another point that is definitely worth underscoring is the captured benefit of the long-dated and fixed rate debt financings that BEP had assumed to accommodate the growth projects. What this means is that while BEP has managed to register a benefit from CPI escalators and fresh operational projects, the average interest rate has largely remained unchanged. It has increased only by 10 basis points compared to Q1, 2023 period that is mostly associated with the assumption of new debt to get the new projects, that are in early stage, going.

Besides this dynamic where the top-line has continued to grow, while the cost positions have come in relatively flat, BEP circulated a very promising information pertaining to its deal with Microsoft. Namely, BEP has succeeded in getting Microsoft on board as a strategic partner (customer), where BEP’s role will be to supply the energy of over 10,500 megawatts of renewable capacity between 2026 and 2030.

Here is a relevant and insightful excerpt from the Q1, 2024 earnings call, where Connor Teskey – CEO – provided his comments on this deal:

The agreement supports Microsoft on a path to achieving their energy procurement needs to support the rapidly growing business in a sustainable manner, while also enhancing our position to achieve or exceed our targeted growth by identifying the key requirements for new capacity, including the location of the capacity and the timeline to deliver. Through the agreement, we have identified projects that are in various stages of development that can be offered to Microsoft under a pre-agreed standard form power purchase agreement.

To put this in the context of current installed capacities of BEP, the deal with Microsoft implies an expansion of the portfolio by more than 30%. This is huge, especially given the fact that Microsoft is not the only avenue of growth for BEP.

For example, already this year, which obviously excludes the Microsoft effect, BEP is set to install more than 7,000 MW of new renewable energy capacities this year. And this figure alone (of annual capacities coming online) is projected to grow as BEP becomes a larger enterprise.

Here in Q1, 2024 earnings call, Connor Teskey gave a nice commentary as well:

And maybe just to give some directional numbers around this, we are currently have a run rate of producing 7,000 to 8,000 megawatts of new generation capacity from organic development within our current business. Those numbers will naturally grow as our existing businesses get built out over time. And obviously, we are a growth company. We are going to consistently add other developers and other pipeline as we move through the remainder of this decade. It’s very conceivable that by the period of ’26 to ’30, we will be producing well over 10 gigawatts a year, if not more.

Finally, an important consideration in this context is BEP’s balance sheet, which also continues to remain robust at an IG-level. A meaningful testament of BEP’s financial capacity and its de-risked business (e.g., via long-term PPAs, asset diversification) has been the Q1, 2024 financing activities. In this period, BEP issued 30-year notes at 5.3%, which less than 100 basis points above the embedded weighted average interest cost and clearly supportive for incremental capital allocation in the renewable energy space.

The bottom line

While the share price is indeed higher after the publication of my bull thesis on BEP, the underlying fundamentals have also improved a lot that fully justify the registered share price uptick.

In my opinion, this quarter has made BEP a more enticing investment case than it was before the Q1, 2024 data points came out. BEP has proved that it can grow its top-line at a more accelerated manner than what the movement in the cost base is, thereby keeping the FFO per share growth at close to double-digit levels. On top of this, BEP has managed to sign a hallmark deal with Microsoft that will take its growth agenda to a next level.

Given all of this, Brookfield Renewable Partners L.P. Limited Partnership Units remains a solid buy for me.