Canada’s Economic Growth Beats Expectations

By Ari Charney • September 4, 2013 • Canadian Edge Weekly

Despite the effect of one-time events, such as historic flooding in Alberta and a province-wide strike in Quebec, Canada’s second-quarter gross domestic product (GDP) grew slightly better than expectations.

The country’s GDP increased at an annualized rate of 1.7 percent, a tenth of a percentage point above the consensus forecast, based on a Bloomberg survey of economists, and seven-tenths of a percentage point greater than the Bank of Canada’s (BoC) ultra-conservative projection.

Meanwhile, first-quarter growth in GDP, which initially came in at 2.5 percent, was revised lower to 2.2 percent. And for the third quarter, the BoC had previously forecast growth of 3.8 percent, due in part to an expected surge in spending following the aforementioned flooding and strikes. However, there’s speculation that this latter figure could be revised downward, as clearly at least some of the spending the central bank expected in the third quarter was pushed forward to the second quarter. The BoC provides its next update to its economic forecasts on Oct. 23.

Although the second-quarter number walloped the BoC’s forecast, the data underpinning this figure have yet to show evidence of the central bank’s anticipated rotation of the economy toward exports and business investment. For that reason, as well as considerable economic slack and a muted inflation outlook, the BoC announced its decision earlier today to maintain its overnight rate target at 1 percent.

While exports, particularly of energy products, metals and minerals, were the biggest contributor to first-quarter GDP, the country turned inward during the second quarter, with growth driven almost entirely by household consumption. Consumer expenditures rose at an annualized rate of 3.8 percent, the fastest pace since the fourth quarter of 2010, largely thanks to purchases of automobiles, which were up 4.7 percent sequentially, accounting for about one-third of the growth in household spending.

This rise in spending also helped spur higher borrowing, according to data from the credit-reporting agency TransUnion. Canada’s level of household debt had retreated from record levels last quarter, but increased by 0.73 percent sequentially during the second quarter and 3.5 percent year over year, to CAD27,131. That figure excludes mortgage debt.

TransUnion says that lines of credit accounted for about 42.5 percent of total consumer debt, though that number declined by 0.9 percent sequentially, the second such quarterly decrease. At the same time, borrowings to finance automobiles grew 1.8 percent sequentially and 3.4 percent year over year. Auto debt accounts for 24 percent of total consumer debt.

On the business spending front, fixed investment fell at an annualized rate of 2.5 percent, with spending on machinery and equipment falling by 2.1 percent, particularly in the industrial and computer categories. And growth in inventories decelerated to CAD5.2 billion from CAD7.7 billion.

Finally, after the first quarter’s 1.2 percent jump in exports of goods and services, growth in this area slowed to just 0.2 percent, though metals and minerals, which were up 4.8 percent, continued to be a significant contributor. However, exports of energy products were down sharply, by 6.3 percent.

Overall, this performance suggests the BoC will remain accommodative on the monetary policy front, a dovish stance in contrast to its central bank peer in the US.

The Roundup

Brookfield Renewable Energy Partners LP (TSX: BEP-U, NYSE: BEP) reported second-quarter adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) of USD357 million, up from USD221 million, as new assets acquired since June 30, 2012, contributed USD45 million.

Funds from operations (FFO) for the quarter were USD187 million, or USD0.71 per unit, which was in line with internal company forecasts and up from USD87 million, or USD0.33 per unit, a year ago.

Brookfield beat analyst estimates for revenue by 3.9 percent, the second consecutive quarter in which it surpassed expectations. On Bay Street, the mix of analyst sentiment now stands at 10 “buys,” one “hold,” and one “sell.”

In the wake of the company’s earnings release, BMO Capital Markets initiated coverage with an “outperform” rating, which is equivalent to a “buy,” while Credit Suisse raised its rating to “outperform” from “neutral,” or “hold.” The 12-month target price is CAD32.15, which suggests a potential return of 15.3 percent from the current unit price.

For full-year 2013, analysts forecast revenue of USD1.74 billion, up 32.8 percent year over year, with FFO per unit of USD2.36, up 54.2 percent. For 2014, both revenue and FFO growth are expected to flatten, with a top-line increase of just 2.3 percent, while FFO per unit projected to rise 5.1 percent.

The USD7 billion partnership is one of the largest publicly traded pure-plays on renewable power, with a USD17 billion portfolio of power-generating assets that span 70 river systems and 12 power markets in the US (50 percent of its portfolio), Canada (35 percent), and Brazil (15 percent). The company boasts 209 generating facilities, 84 percent of which generate hydroelectric power, while 12 percent generate wind power.

Since the beginning of 2012, Brookfield has been quite busy on the mergers and acquisitions (M&A) front: Over the past 12 months, the company has grown its installed capacity by roughly 20 percent, with 590 megawatts (MW) added since the beginning of the year. However, the company’s strategy also includes opportunities for growth via greenfield projects, with 25 projects underway for a total of 1,800 MW of generating capacity, equivalent to about 30.5 percent of its current portfolio.

Brookfield’s customer base averages around three million homes per year, and power is generally sold under long-term, inflation-linked power-purchase agreements (PPA). In terms of cash flow, the company’s output is 95 percent contracted for 2013 and at least 80 percent contracted over each of the next five years. The weighted average duration of its PPAs is currently 19 years.

During the most recent quarter, total generation was 6,265 gigawatt hours (GWh) compared to the long-term average of 6,171 GWh and to 4,101 GWh a year ago. Hydroelectric generation was 1,948 GWh higher than the prior year, reflecting the solid performance of new assets that contributed 994 GWh to generation.

Management also noted a return to long-term average generation in the current quarter relative to the very dry conditions in the same period last year. Reservoir levels on a portfolio basis are in line with long-term average conditions for this time of year.

Generation from wind totaled 737 GWh and was essentially in line with the long-term average. Wind generation increased by 270 GWh on a year-over-year basis on improved wind conditions, as well as the acquisition of wind facilities in California.

As for future acquisitions, in addition to the US, management sees opportunities in Europe, particularly countries, such as those in Northern Europe as well as the UK, with the relative fiscal strength and policies to support renewable energy investments. But they’re pursuing a gradual and highly selective process before deploying capital there.gp

Brookfield’s units are down 12.3 percent from their 52-week high back in early March. The units nearly breached that earlier high again at the beginning of May before they succumbed to the broad selloff that’s plagued dividend stocks since then. 

In March, Brookfield increased its quarterly distribution by 5.1 percent, to USD0.3625, and the forward yield is currently 5.5 percent. The payout has grown 3.8 percent annually over the past three years, and management intends to grow the distribution by 3 percent to 5 percent per year. The company targets a payout ratio between 60 percent and 70 percent of FFO, and based on this metric, the payout ratio for the quarter was 51.1 percent.

At quarter end, Brookfield had USD231 million in cash and cash equivalents on its balance sheet, along with USD6.9 billion in long-term debt. Although the latter figure is roughly equivalent to the firm’s market cap, long-term debt is just 39.2 percent of total assets.

Additionally, Brookfield’s management has shrewdly used the prevailing environment of historically low interest rates to reduce its borrowing costs and extend the duration of its debt. The company’s average debt duration is eight years at the corporate level and 12 years at the subsidiary level. Brookfield’s next significant maturity is a CAD300 million bond due Nov. 30, 2016.

Brookfield Renewable Energy Partners LP remains a buy below USD32 in the Conservative Holdings Portfolio.

Here’s where to find our analyses for Portfolio Holdings that have reported earnings for the second quarter of 2013:

Conservative Holdings

Aggressive Holdings

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