Brookfield: Renewable Returns
08/01/2017 2:50 am EST
This CA$500 million transaction is part of Brookfield Asset Management’s (BAM) outright acquisition of TerraForm Global and purchase of a 51 percent controlling interest in TerraForm Power.
These yieldcos, which primarily own renewable-energy capacity, found themselves orphaned and in dire financial straits after their sponsor, SunEdison (SUNEQ), declared bankruptcy.
The bankruptcy court has approved both yieldcos’ settlement agreements with SunEdison, moving the deal one step closer to the finish line.
Brookfield Renewable Energy Partners completed a CA$550 million equity offering earlier this month to finance the transaction, with Brookfield Asset Management buying enough equity to maintain its 60 percent interest in the master limited partnership (MLP).
With the stock trading near an all-time high when the offering was announced, this transaction looks particularly well-timed.
For Brookfield Renewable Energy Partners, the acquisition underscores the value of having a supportive sponsor and gives the MLP a solid presence in India, a country with big plans to expand its renewable-energy capacity.
Prime Minister Narendra Modi continues to push for the country to reduce its dependence on coal-fired power plants while improving access to electricity in underserved areas.
TerraForm Global’s portfolio also includes assets in China, South Africa and Thailand — other markets that are poised for growth. Meanwhile, Terraform Power’s solar power assets complement Brookfield Renewable Energy Partners’ hydroelectric and wind-power capacity in the US, Canada, Chile and the UK.
The deal also increases the proportion of Brookfield Renewable Energy Partners’ generation mix that isn’t subject to the vagaries of wind conditions and water levels.
This opportunity set, coupled with the favorable price on this distressed sale, should outweigh the risk associated with TerraForm Global and TerraForm Power’s exposure to residential solar power.
With additional interests in these yieldcos likely to migrate to Brookfield Renewable Energy Partners over time, the MLP should be able to continue growing its distribution at an annual rate that’s in the high single digits.
This growth potential, coupled with a strong balance sheet and low cost of debt capital, warrants a higher buy target. BEP rates a buy up to US$33 per unit in our conservative income portfolio.
Note that investors can elect to receive their quarterly distributions in US or Canadian dollars. Our return calculations use US dollars for the payout.