Brookfield Renewable Corporation: FY2020 and Q4 Summary
Business context and reporting period
Form 20-F annual report for the fiscal year ended December 31, 2020, prepared under IFRS. Brookfield Renewable Corporation was formed in 2019 and became the corporate vehicle for assets contributed by Brookfield Renewable Partners L.P. The financial statements reflect common-control transactions retrospectively and therefore are not fully comparable to standalone BEPC results. The company operates approximately 12,812 MW of hydroelectric, wind, solar, storage and ancillary capacity across North America, Europe, Brazil and Colombia, plus approximately 1,800 MW of Brazilian solar projects under development.
BEPC exchangeable shares are intended to provide an economic return equivalent to one BEP unit. The shares began trading on the NYSE and TSX on July 30, 2020, and were split three-for-two in December 2020. There were 172.2 million BEPC exchangeable shares outstanding at year-end.
Financial performance and key metrics
| US$ millions, except percentages | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $3,087 | $3,226 | (4%) |
| Net income (loss) | $(2,819) | $212 | Declined $3,031 |
| Operating cash flow | $992 | $1,356 | (27%) |
| Capital expenditures | $373 | $406 | (8%) |
| Non-recourse borrowings | $12,822 | $11,958 | 6% |
| Total assets | $39,473 | $35,757 | 10% |
- Consolidated revenue was $3.087 billion. Direct operating costs were $1.061 billion, management service costs were $152 million, interest expense was $816 million and depreciation was $1.065 billion.
- The reported net loss included a $2.561 billion non-cash remeasurement loss on BEPC exchangeable and class B shares as the BEP unit price appreciated, a $231 million legal provision related to TerraForm Power litigation, and $116 million of dividends on BEPC exchangeable shares presented as interest expense.
- On a proportionate basis, generation was 15,578 GWh, revenue was $1.138 billion, Adjusted EBITDA was $751 million and Funds From Operations was $402 million. Proportionate Adjusted EBITDA and FFO margins were approximately 66% and 35%, respectively.
- Hydroelectric proportionate FFO declined to $417 million from $518 million, primarily because generation was 11% below the unusually strong 2019 level and foreign currencies weakened. Wind FFO increased to $48 million from $21 million, while solar contributed $33 million for the first reported year following the TerraForm Power acquisition.
- Q4 2020 revenue was $746 million versus $781 million in Q4 2019. Q4 consolidated net loss was $1.632 billion versus $42 million in Q4 2019, primarily reflecting the exchangeable-share remeasurement. Q4 proportionate Adjusted EBITDA was $215 million and FFO was $85 million, compared with $169 million and $97 million, respectively, in Q4 2019.
Liquidity, debt and capital resources
- Group-wide available liquidity was $3.270 billion at December 31, 2020, comprising $134 million of the company’s share of cash, $2.150 billion of authorized credit facilities, $347 million of available subsidiary facilities and $639 million of proportionate Brookfield Renewable group liquidity.
- Consolidated non-recourse borrowings were $12.822 billion, with a weighted-average interest rate of approximately 4.1% and a weighted-average term of 10 years. Consolidated debt-to-total capitalization was 36%.
- Proportionate non-recourse debt was $5.523 billion, with a weighted-average interest rate of 4.2% and a weighted-average term of 10 years. Approximately 15% of proportionate debt remained exposed to floating rates after hedging.
- Proportionate principal repayments total $245 million in 2021, $449 million in 2022, $648 million in 2023, $301 million in 2024 and $504 million in 2025. Management stated that it did not anticipate material difficulty addressing borrowings through 2025.
- The company paid $100 million of dividends on BEPC exchangeable shares in 2020. Brookfield Renewable targets a payout ratio of approximately 70% of FFO and annual distribution growth of 5% to 9%. A 5% increase to $1.215 annually per BEP unit and BEPC exchangeable share was approved for payments beginning in March 2021.
Material changes versus the prior comparable period
- The July 2020 special distribution established BEPC as a publicly traded corporate structure, and the July 31, 2020 TerraForm Power acquisition added significant wind and solar capacity and non-controlling interests.
- Revenue declined because generation was lower than in 2019, when hydrology was above average, and because the stronger U.S. dollar reduced reported foreign-currency revenue by approximately $177 million. Higher pricing, inflation-linked contracts and acquired facilities partly offset the decline.
- Interest expense increased by $115 million, management service costs increased by $43 million and depreciation increased by $82 million, largely due to portfolio growth and BEPC share dividends.
- Property, plant and equipment increased to $36.1 billion from $32.6 billion, principally due to a $3.7 billion revaluation gain, $661 million of Spanish concentrated solar assets acquired and $865 million of capitalized additions, partly offset by depreciation and foreign exchange effects.
- Cash flow from investing activities improved to an outflow of $478 million from $1.102 billion, as 2019 included the $732 million acquisition of a U.S. distributed-generation solar portfolio. Financing activities used $475 million in 2020, including $748 million of distributions to the partnership and participating non-controlling interests.
Guidance, outlook, risks and unusual items
- Management targets long-term total returns of 12% to 15% on renewable assets, supported by contracted cash flows, development, acquisitions and asset upgrades. The company reported approximately 84% of group generation contracted for the following five years, with PPAs in Brazil, Colombia and the United States having a weighted-average remaining duration of approximately 14 years on a proportionate basis.
- Post-year-end commitments included acquisitions of an 845 MW U.S. wind portfolio, a U.S. distributed-generation platform with 360 MW operating and more than 700 MW under development, Colombian hydroelectric and solar portfolios, and a Brazilian wind development portfolio. These transactions remained subject to customary closing conditions as described in the filing.
- TerraForm Power received an adverse summary judgment in December 2020 involving a legacy First Wind dispute. The award was approximately $231 million plus 9% annual non-compounding interest accrued since May 2016. The company appealed and posted a surety bond; the ultimate outcome is uncertain.
- Key risks include hydrology, wind and solar resource variability; power-price volatility and increasing uncontracted generation; PPA renewals and counterparty performance; foreign exchange exposure; regulatory, concession and permitting changes; equipment, dam, transmission and construction risks; leverage and refinancing; climate change; COVID-19; cyber security; litigation; and political and tax risk in emerging markets.
- Brookfield and the partnership collectively held approximately 81.5% of BEPC voting power at the filing date. BEPC is externally managed by Brookfield, bears its proportionate management costs and cannot independently terminate the Master Services Agreement except under limited circumstances. Related-party conflicts and allocation of investment opportunities are material governance considerations.
- The company reported no material off-balance-sheet arrangements, but issued $687 million of letters of credit and guaranteed certain partnership debt, preferred securities and credit facilities.
Important facts for investors to verify
- Reconcile consolidated IFRS results with proportionate Adjusted EBITDA and FFO, which are non-IFRS measures and include different ownership and equity-accounting treatments.
- Assess the sustainability of operating cash flow and FFO after below-average hydro generation, foreign exchange movements, dividends, capital expenditures and debt service.
- Review the valuation sensitivity of the $36.1 billion power-generating asset balance to discount rates, future electricity prices, generation assumptions and terminal capitalization rates.
- Monitor the TerraForm Power litigation appeal, the $231 million provision, accrued interest and potential dilution or additional cash requirements.
- Evaluate debt maturities, covenant restrictions, guarantees, restricted cash and the ability to refinance or recycle capital on acceptable terms.
- Review the effect of Brookfield control, management fees, incentive distributions, related-party transactions and investment-allocation conflicts on public shareholder returns.
- Confirm the closing status and funding requirements of post-year-end acquisitions and the company’s ability to maintain the intended economic equivalence and dividend policy between BEPC shares and BEP units.