Last year was an odd one for Brookfield Renewable Partners (NYSE: BEP). That's because the renewable power company's value declined 25% even though it generated solid earnings growth and made excellent progress on its strategic plan. Because of those and other factors, 2018 was "another strong year" for the company, according to comments by CEO Sachin Shah on the fourth-quarter conference call. Overall, he detailed four reasons why last year was a successful one.
1. We delivered solid growth
One of the factors Shah highlighted on the call was the company's earnings growth. He noted that "in 2018, our FFO increased 14% on a per-unit basis over the prior year as all of our businesses performed in line with expectations." That strong performance makes last year's sell-off even more puzzling. With earnings rising double digits even as its unit price slumped, it makes the company's current valuation much more attractive to investors since units have gotten significantly cheaper in the past year.
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2. Our cost-cutting initiatives are paying dividends
Shah noted on the call that one of the company's "key operating priorities included cost reduction initiatives in North America and Colombia." These programs "should improve our margins by approximately $20 million annually in the future," according to Shah. That's a meaningful level of incremental earnings for a company that generated $676 million in FFO last year as it should pad the bottom line by about 3%.
3. We made solid progress on our expansion program
In addition to the earnings boost from cutting costs, Brookfield Renewable Partners also invested in several key growth initiatives that should enable it to continue expanding FFO in the coming years. As Shah stated, "from a growth perspective, we commissioned approximately 60 megawatts of new wind and hydro development, advanced over 350 megawatts of development in our pipeline, and maintained our opportunistic approach to development which minimizes funding obligations and ongoing costs."
Overall, according to the CEO, "we invested $550 million into growth during the year, including acquisitions and share buybacks." One of its biggest investments was boosting its stake in fellow renewable power company TerraForm Power (NASDAQ: TERP). Brookfield invested another $420 million to increase its interest to 30% in a deal that enabled TerraForm to acquire a portfolio of wind and solar power assets in Western Europe that should help drive its growth for the next couple of years.
The company also took advantage of the decline in its unit price to repurchase some units last year. It spent about $50 million to buy 2 million units at $27 apiece, which was near the low point of the year. Those repurchases enabled the company to return even more cash to investors last year above its high-yielding distribution.
4. We further shored up our financial profile
Finally, Shah said that "our balance sheet and funding capabilities are strong" after the company completed a string of transactions to boost its financial profile. He added:
We executed on our asset recycling strategy, selling a partial interest in mature assets and exiting non-core markets. We extended all near-term debt maturities during the year, increasing the average duration of our debt to 10 years. We now have no material debt maturities until 2023.
Those asset sales increased the company's liquidity up to $2.2 billion, which gives it plenty of funds to invest in future expansion initiatives. The company's aim going forward is to finance most of its growth through a combination of asset sales, retained cash flow from the business, and the issuance of preferred equity and corporate debt as it aims only to issue common equity "when it makes financial sense," according to CFO Wyatt Hartley. Because of its success last year in shifting its financing model, Hartley stated that "we are not reliant on accessing this market to fund our growth."
Don't let the sell-off fool you
Last year was another strong one both operationally and financially for Brookfield Renewable Partners as earnings expanded 14% while the company also shored up its balance sheet even as it continued investing with an eye toward the future. As a result, 2018 should be considered a success even if the company's unit price doesn't reflect that. Instead, last year's sell-off is another reason why Brookfield is one of the top renewable energy stocks to buy right now.
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