DBRS Confirms Great Lakes Hydro Income Fund at STA-2 (high)

DBRS has today confirmed the stability rating of Great Lakes Hydro Income Fund (GLHIF or the Fund) at STA-2 (high). This action follows the announcement of a number of strategic initiatives of the Fund, including a Transaction under which its intends to acquire from Brookfield Renewable Power Inc. (BRP, rated BBB (high) with a Stable trend) substantially all of its renewable power generating facilities in Canada.

The Fund will acquire from BRP both assets and contractual benefits consisting primarily of:

-- 15 hydroelectric generation facilities (387 MW) currently in operation. These to-be acquired assets consist primarily of the 12 station Great Lakes Power Limited (GLPL), a 349 MW complex located in Northern Ontario.
-- An increase in the price of power (to $68/MWh) which the Fund currently sells from two of its existing assets, Lievre Power L.P. (rated A (low) and Mississagi Power Trust (rated A (low)), to BRP. BRP will also guarantee the price GLHIF will receive on all of GLPL’s output and sales at an initial fixed price of $68/MWh. All three of these contracts are long term, with the Lievre contract ending in 2019, the Mississagi contract ending in 2022 and the GLPL contract running initially until 2029.
-- A 50 MW wind power generation facility currently in development, which, upon completion, will sell all generating output to the Ontario Power Authority.

The Transaction is valued at approximately $945 million, which will be funded through the issuance of $760 million of Fund units, as well as a $200 million senior unsecured note issued to BRP. BRP will purchase a sufficient amount of the newly issued units to maintain its majority (50.01%) ownership of the Fund. A special independent committee of the Fund’s board of trustees has approved the Transaction, which is subject to closing conditions, regulatory approvals and minority unitholder approval. Closing is expected in the third quarter of 2009.

The stability rating confirmation is supported by: i) the expected accretive impact of the Transaction on the Fund’s distribution profile; ii) the improvement in scale and diversification of the Fund’s operation as a result of the addition of operating assets; iii) the downside protection provided by the fixed price nature of the new/revised power contracts; and iv) a growth platform supported by solid operating cash flows.

Based on long-term average generation, the Transaction is expected to increase the Fund’s distributable cash flow by approximately $100 million per year, and as the per unit distribution is not expected to increase as a result of the Transaction over its current $1.25/unit, reduce the payout ratio to the approximately 80% range. This will improve the stability of the existing $1.25/unit distribution. The $200 million of senior notes at the Fund level do not pose a large concern from the perspective of distribution stability, given the strong levels of cash flows expected to be generated at the Fund’s various generating assets, assuming long-term average generating levels.

Concurrently, the Fund also announced that it intends on converting to a corporate entity on or before January 1, 2011, subject to unitholder approval. The Fund’s ability to maintain its current unit distribution level after a corporate conversion would be enhanced by the Transaction.

The Transaction will expand the Fund’s renewable power generation portfolio to nearly 1,700 MW of installed capacity and 6,500 GWh of expected annual production. The additional wind power facility under development will provide tax benefits when completed and the Fund becomes a taxable entity, as well as diversification and growth potential of the Fund’s renewable resources and technology.

The stability rating has been confirmed at STA-2 (high) as the positive benefits of the Transaction are largely viewed as offset by the increased concentration of counterparty risk. Post-Transaction, the large majority of the Fund’s cash flows will be linked to power sales arrangements with the BBB (high) rated BRP.

In conjunction with the Transaction, the Fund announced that it will change its name to Brookfield Renewable Power Fund following the completion of the current transaction.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Income Funds, which can be found on our website under Methodologies.

This is a Corporate rating.