DBRS Confirms Brookfield Renewable Power Inc. (BRP), Trend Stable

DBRS has today confirmed the ratings on the Senior Unsecured Debentures and Medium-Term Notes and the Commercial Paper of Brookfield Renewable Power Inc. (BRP or the Company) at BBB (high) and R-1 (low), respectively, with Stable trends. The ratings continue to reflect the strength of BRP’s high-quality, long-life, and cost-competitive renewable power assets with reasonable geographic diversification and contract protection in market regions with robust supply-and-demand fundamentals. The long-term prospects of the Company’s renewable energy assets, being environmental-friendly and carbon-free, remain favourable, given continuing long-term trends of rising energy demand, volatile global fuel supply, as well as increasing sensitivity toward environmental and climate-change issues. In a shorter time frame, hydrology and/or power market conditions can cause fluctuations in the operating and financial performance in the normal course of BRP’s renewable business.

On May 2, 2008, the ratings of BRP’s predecessor entities, Brookfield Power Corporation (BPC) and Brookfield Power Inc. (BPI) were transferred to BRP, following the amalgamation of BPI and BPC into BRP. BRP assumed all of BPC’s and BPI’s obligations, and the amalgamation was viewed by DBRS as not impacting creditworthiness (see DBRS press releases of April 2, 2008, and May 2, 2008, for details).

Over the past few years, BRP has grown substantially through various acquisitions. Total net capacity increased from approximately 700 MW in 2001 to 2,870 MW by Q3 2008. Portfolio growth not only added size and scale to the Company’s asset base but also led to greater operational and geographical diversification, which helps mitigate the risk of extended plant outages and hydrology/price volatility at any specific site.

Earlier this year, the Company acquired Itiquira, a fully contracted 156 MW hydroelectric generation facility in Brazil. Given BRP’s and its parent company, Brookfield Asset Management Inc.’s (BAM, rated A (low)) experience in Brazil, and the modest size of the transaction, the acquisition was not viewed as having a material impact on the Company’s credit profile, although the added exposure to Brazil (rated BBB (low) by DBRS), while modest, does introduce new risks (e.g., political, currency, etc.). BRP has also stated its intention to eventually acquire all of BAM’s Brazilian hydroelectric generation assets (currently totaling 314 MW). DBRS would assess the impact of such a transaction, if it proceeds, as more information becomes available.

BRP’s debt levels have risen over time, mostly due to the addition of non-recourse project level debt coupled with an increase in corporate-level debt. Project-level borrowings result in a shift of business risk (from the perspective of a BRP creditor) from BRP to the individually-financed projects, but do increase subordination of the corporate borrowings. The key credit metrics (all DBRS estimates) supporting the rating profile are based on BRP from a non-consolidated perspective, with BRP-level debt-to-capital at 19%, adjusted non-consolidated interest coverage of approximately eight times and non-consolidated cash flow-to-corporate debt of 41%. BRP has repeatedly stated its capital management objective to maintain an investment grade credit rating with prudent use of leverage to ensure access to incremental borrowings for new growth initiatives as well as to enhance return to shareholders. DBRS would expect future material acquisitions to be permanently funded with a mix of internal cash flow, non-recourse project level debt and/or equity. BAM has also stated that it is currently exploring alternatives to share its ownership of BRP on a fee-bearing basis, which could potentially help broaden the source of equity capital. DBRS would evaluate the credit impact on BRP, if any, when such transactions were to materialize. BAM’s influence on BRP is noticeable, including the sizeable amounts of inter-company accounts on BRP’s balance sheet (28% of total assets).

BRP continues to manage the two key factors that cause its cash flow variability: (1) production volume risk due to fluctuation in hydrology; and (2) volatility in wholesale power prices, as the Company has some revenue exposure to spot market sales and shorter-term contracts. Variation in production can be expected for renewable energy businesses. For instance, BRP’s power generation in 2007 was below the long-term average due to lower water flow, while production in 2008, especially in the third quarter, recovered substantially, as a result of high water flow. To mitigate the power market volatility, BRP has long-term power purchase agreements covering about half of its expected power generation and shorter-term contracts for approximately one-quarter of production, insulating a core stream of cash flow from power market risk. The non-contracted portion will allow BRP to use the flexibility of its reservoir capacity and the low-cost position of its operation to capture value in the spot market. Although the recent slowdown in global economy could cause a softening of energy demand and prices, BRP’s cost-competitiveness and contract profile should mitigate much of this downside risk.

BRP’s liquidity is supported by cash, short-term investments, and a credit facility. The Company is exposed to some near-term refinancing risk. Maturities due in 2009 include a CAD 450 million BRP-level debenture toward year end and one project-level debt issue of CAD 75 million. DBRS would expect refinancing to be executed well in advance of each due date.

The ratings remain constrained primarily by the Company’s exposure to hydrology and price risk, as well as the significant subordination to asset-level debt. To maintain a solid credit profile in the current rating category, the Company will need to maintain a financing strategy that is suitable and appropriate for the nature of its business and the range of its cash flow variability.

Note:
All figures are in U.S. dollars unless otherwise noted.