Time to Renew

Hydroelectric power is ubiquitous in many Canadian provinces, so much so that the word “hydro” has come to stand for electricity generally; the names of the government-run companies that provide such power–BC Hydro, Manitoba Hydro, the former Ontario Hydro, now Hydro One, Hydro-Quebec, Newfoundland and Labrador Hydro–reflect this significant presence.

For decades Canadians have exploited another of the Great White North’s abundant natural resources, water, to create electricity. Canada is the second-largest producer of hydroelectric power in the world, trailing only China. It’s one of a handful of nations–Brazil, Norway, Switzerland and Venezuela are the others–that produce more than half their total generation from hydro.

According to the US Energy Information Administration (EIA), in 2008 Canada produced 369.5 terrawatt hours (TWh) of electricity using hydroelectric dams, almost 12 percent of all the hydroelectricity generated in the world and 61 percent of all electricity generated in Canada.

For reference sake, China produced 585.2 TWh; the Middle Kingdom is the most aggressive country in the world when it comes to increasing hydro capacity. There are 19 projects with generating capacity of more than 2,000 MW in various stages of construction, representing approximately 76,000 megawatts (MW) of generation capacity; another nine projects worth 40,000 MW have been proposed.

It’s an explosive story in Asia. It’s a familiar, reliable one in North America.

One of the steadiest hydro producers, Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF), doubled the fun with its fourth-quarter and full-year 2009 earnings announcement, revealing expectations-beating operational results as well as an investor-friendly distribution increase. With 42 hydroelectric facilities and one of Canada’ largest wind farms, Brookfield Renewable boasts total installed capacity of 1,700 MW.

Management boosted the distribution 4 percent to annualized rate of CAD1.30 per unit, a level it considers “sustainable after the fund’s conversion to a corporation later this year.” Brookfield Renewable, like so many trusts, will maximize the tax benefits it currently enjoys and convert as late as possible in 2010.

Fourth-quarter revenue was CAD87.9 million, up from CAD39.9 million a year ago. Revenue for 2009 was CAD288 million, up 47 percent. Income before non-cash items was CAD39.3 million for the fourth quarter, up from CAD18.7 million. For the year it was CAD140 million, a 40 percent increase. An 80 percent payout ratio gives management enough room to use cash to grow even after it pays a solid dividend.

CEO Richard Legault discussed plans to spend CAD500 million over the next five years, many of which will be done with Brookfield Renewable Power Inc. The typical project will be anchored with a 20-year power purchase agreement (PPA), which means predictable, locked-in cash flow that justifies a little more leverage.

The highlight of 2009, of course, was the former Great Lakes Hydro Income Fund’s transformation into “Brookfield Asset Management’s (TSX: BAM/A, NYSE: BAM) exclusive vehicle for contracted hydro and wind generation in Canada” via the combination with the former Brookfield Canadian Renewable Power.

Since October 2006 management has focused on tightening operations, cutting costs and adding assets. Increased and more efficient output has helped the company grow cash flow, which, in turn, means the distribution has been steady–through the post-Halloween Nightmare period as well as into and out of the recession. Great Lakes Hydro/Brookfield Renewable started paying CAD0.10 per unit per month in June 2003. It raised the distribution to CAD0.10125 for the January 2005 payment, then to CAD0.1033 for January 2006. About the worst thing you could say is management tightened the purse from August 2006, after it hiked the monthly payout to CAD0.10417.

For February 2010 Brookfield Renewable Power will pay CAD0.1083 per unit. At 6.4 percent the yield certainly doesn’t grab you by the throat. But management has shown it knows how to sustain the payout. Slow and steady is winning the race: Since Great Lakes’ inception in 1999 the fund has grown seven fold, and if you bought on CE’s recommendation in November 2008 you’re up more than 48 percent in US dollar terms versus 40 percent for the S&P/TSX Composite and just 15 percent for the S&P 500.

Two percent annual dividend growth doesn’t sound very ambitious. But take a look around and count the number of firms that were even able to maintain their dividend from 2007 to 2009. Brookfield Renewable Power Fund packs the gear to continue to grow its dividend well beyond 2011.

The Care of Bubbles

An interesting debate has raged in recent months over whether Canada’s housing market is in a bubble. This week Finance Minister Jim Flaherty acted to either rein in or prevent one, depending on where you stand on the issue. The Canadian Real Estate Association reported a 72 percent year-over-year increase in sales for December. The industry group forecast Canadian home prices and resales will approach record levels in 2010, helped by low interest rates.

Changes slated to become effective April 19 mean that Canadian homebuyers will have to meet standards for five-year, fixed-rate mortgages even if they opt for variable-rate mortgages. Limits on refinancing will also be stricter, and people buying a home that they don’t occupy must make a down payment of 20 percent.

According to a Bloomberg News report, Flaherty intends these measures to “moderate” the housing market. The finance minister said the changes will prevent borrowers from building up “unsustainable debt levels” and “help Canadians prepare for higher interest rates in the future.” In 2008 the Finance Dept promulgated rules that made the Canada Mortgage and Housing Corp limit amortizations to 35 years, down from 40 years, and offer loan insurance on 95 percent of the loan value, as opposed to 100 percent previously.

Act Now

Are you serious about investing in the Canadian story? Join Roger Conrad in sunny San Diego, California, April 23-24 for the 2010 Wealth Society Member Summit. You’ll have a chance to sit down with Roger one-on-one to talk about where to find the best ideas to generate total returns as Canadian income trusts convert to high-yielding corporations and how to position your portfolio for the year ahead.

Join Roger and his colleagues GS Early, Elliott Gue, Yiannis Mostrous, and Benjamin Shepherd at the historic Hotel del Coronado–one of the top 10 resorts in the world according to USA Today, one of the top 20 hotel/spas in the world according to Travel + Leisure, and the No. 2 place in the world to get married, according to the Travel Channel.

And on April 23-24, Coronado Island will also be the best place in the world for relaxation and profit. We’re expecting 72 degrees,sun and fun. You may find all details at www.InvestingSummit.com.

Call 1-800-832-2330 (between 9:00 a.m. and 5:00 p.m. EST Monday through Friday) or go online now to reserve your seat at the table. Space is limited.