Lower water levels and unfavorable international currency exchange rates hurt top Canadian income trust Brookfield Renewable Energy’s 2015 financial results. However, that failed to dampen the partnership’s management’s outlook and they recently raised the trust’s distribution.
Below average water levels in both the U.S. and Brazil and currency headwinds hurt Brookfield Renewable Energy Partners L.P.’s (TSX─BEP.UN) financial results in 2015. Despite this, management remains confident about Brookfield’s outlook, as demonstrated by its recent decision to raise the income trust partnership’s distribution by seven per cent.
What’s more, management expects the distribution to continue to rise over time in line with its five-to-nine-per-cent annual target. This confidence, management argues, is supported by Brookfield’s stable operating profile, financial flexibility, organic growth prospects and the proven operating history of its renewable power generating assets.
Brookfield Renewable Energy Partners operates one of the world’s largest publicly-traded, pure-play renewable power platforms. Its portfolio consists of hydroelectric and wind power plants in North America, Latin America and Europe, and totals more than 7,000 megawatts of installed capacity, generating enough renewable energy to power four million homes.
For the year ended Dec. 31, 2015, Brookfield’s funds from operations (FFO) were US$467 million, or $1.69 a unit, compared with $560 million, or $2.07 a unit, in 2014.
This decrease partly reflected a 4.5-per-cent drop in revenues to $1.6 billion. That’s largely because the North American hydroelectric power portfolio experienced a 5.8-per-cent decrease in generation combined with a relatively lower pricing environment, particularly in the first quarter of the year.
Meanwhile, changes in the exchange rates between the U.S. dollar and the Canadian dollar, euro and Brazilian real also impacted results. Not only did the appreciation of the U.S. dollar reduce revenues, but it affected operating and borrowing costs and, with the effect of the ongoing foreign currency hedging program, further reduced FFO. Direct operating costs were up 5.3 per cent to $552 million, while interest expenses from borrowing rose 3.4 per cent to $429 million.
While hydrological power-generating conditions were below the long-term average across North America for the year, inflows improved later in the year. Similarly, hydrology also improved in Latin America in the final quarter. These developments should contribute to a rebound in FFO in 2016.
The units trade at a somewhat high 14.1 times this year’s forecast adjusted FFO of C$2.65 a unit. Brookfield’s peer group, on average, trades at about nine times estimated FFO. The premium multiple reflects Brookfield’s large hydro weighting.
Though they trade at a premium, the units sport a yield of 6.4 per cent. In view of the stability and growth potential of the distribution, we find this yield very attractive. Brookfield Renewable Energy is a buy for income and some growth.
Money Reporter, MPL Communications Inc.
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