Green Winds Blowing in Canada
06/01/2016 7:00 am EST
There's a green wind blowing across Canada, and it's going to change the way we live in fundamental ways, whether we like it or not. It will also create new investment opportunities, some of which are apparent right now, states Gordon Pape, editor of The Income Investor.
Prime Minister Justin Trudeau signed the Paris climate change treaty during a visit to the United Nations. It commits Canada to reducing greenhouse gas (GHG) emissions to 70% of 2005 levels by 2030.
Here are two green companies that offer good cash flow right now plus the advantage of being in the sweet spot as the push to reduce GHG emissions builds.
TransAlta Renewables (RNW)
This is a spinoff company from TransAlta Corp., which retains majority control. The parent company "drops down" assets into the RNW portfolio in exchange for cash and debt assumption.
RNW's mandate is to develop and manage a portfolio of renewable energy resources that includes wind, hydro, and natural gas. Most of the gas operations are in Western Australia; however, the largest one with 506 megawatts (MW) is in Sarnia, Ontario.
The hydro projects are concentrated in British Columbia, Alberta, and Ontario. Wind facilities are spread across Canada; indeed, RNW is Canada's largest producer of wind power.
In total, the company has interests in 18 wind facilities, 13 hydroelectric facilities, eight natural gas generation facilities (including one currently under construction), and one natural gas pipeline.
In 2015, the company reported revenue of $235.7 million, slightly higher than the previous year. Net earnings were $198.4 million ($1.18 per share) compared with $114.7 million ($0.42 per share) in 2014.
Revenue was flat in the first quarter of 2016 at $68 million. The company reported a net loss of -$36 million (-$0.16 per share), mainly due to acquisition costs.
However, adjusted funds from operations increased 91%, to $82 million ($0.37 per share) compared with $46 million (also $0.37 per share due to dilution) in the same period of 2015.
The company increased its monthly dividend by 4.7% at the start of this year, to $0.0733(about $0.88 annually). The shares yield 6.9% at the May 20th closing price in Toronto of $12.81.
This is an attractive situation for investors who are willing to accept somewhat more risk. The yield is high but appears sustainable and the company has lots of room to grow as the green momentum builds. Buy.
Brookfield Renewable Partners (BEP)
This Bermuda-based limited partnership operates one of the world's largest publicly traded renewable power portfolios.
Its assets include hydroelectric dams and wind projects in the US and Canada, South America (Brazil, Columbia), and Europe (Ireland, Great Britain, Portugal).
The partnership got off to a strong start this year with first-quarter revenue increasing 53% over the previous year to $674 million (figures in US dollars).
Funds from operations (FFO) came in at $187 million ($0.68 per unit) compared with $153 million ($0.56 per unit) in the same period of 2015.
Net income was $79 million ($0.16 per unit, fully diluted), up from $51 million ($0.10 per unit) in the prior year. Liquidity at the end of the first quarter was $1.3 billion.
The partnership recently acquired what is expected to be a 25% position worth $400 million in Colombian energy producer Isagen S.A. and also closed a deal in Pennsylvania that consists of two hydro facilities.
The units pay a quarterly distribution of US$0.445 (US$1.78 per year). This was increased by 7.2% in January. The limited partnership targets distribution increases of between 5% and 9% annually.
The yield at the current price is 6.1%. This partnership offers sustainable cash flow, international diversification, and the deep pockets needed for continued growth. We rate the shares a buy.
By Gordon Pape, Editor of The Income Investor