DBRS Assigns Brookfield Renewable Power Fund Issuer Rating of BBB (high) and Provisional Preferred Rating of Pfd-3 (high) to Subsidiary

DBRS has today assigned an Issuer Rating of BBB (high) with a Stable trend to Brookfield Renewable Power Fund (BRPF or the Fund) and a provisional rating of Pfd-3 (high) to the expected issue of Preferred Shares, Series 1 by Brookfield Renewable Power Preferred Equity Inc. (Finco). The Finco preferred share offering is expected to result in gross proceeds of $175 million; the underwriters have an over-allotment option that could increase the gross proceeds by an additional $26 million. The assigned ratings reflect the strong financial profile and modest business risk of the Fund’s renewable power generating business. The Finco rating is based on the subordinated guarantee of the Fund.

The Fund has a renewable power generating portfolio totaling 1,652 megawatts (MW), the vast majority of which are hydroelectric, with hydrology risk somewhat mitigated by geographic diversity. All energy production is sold under longer-term contracts or price guarantees, minimizing exposure to market price risk. These factors and the Fund’s solid operating performance are expected to result in a stable financial profile, with any variability largely due to hydrological conditions. The Fund made a significant asset acquisition and received contract amendments as part of a 2009 transaction (the Transaction, as described in DBRS’s July 6, 2009, press release) with Brookfield Renewable Power Inc. (BRP; rated BBB (high)). The Transaction improved BRPF’s contract profile and expanded the size, scale and diversity of its asset portfolio. The Fund primarily acquired 387 MW of hydroelectric generation in Ontario, an increase in the price of power (to $68/MWh) that two of the Fund’s subsidiaries receive (Lièvre Power Financing Corporation (rated A (low)) and Mississagi Power Trust (rated A (low)), as well as a BRP price guarantee for energy sales from the newly acquired assets in Ontario (with an initial fixed price of $68/MWh).

The $945 million Transaction was conservatively financed from a credit perspective, with $760 million from Fund units and $200 million from a senior unsecured note issued to BRP. The proceeds of the Finco preferred share offering will be used to repay (in whole or in part) the unsecured note, leaving minimal to no debt at the Fund level (although approximately $1.4 billion of asset-level debt remains in place). DBRS does not anticipate a material change in the financing strategy of the Fund, which has historically been equity (units) at the Fund level and asset-level non-recourse debt; however, the BBB (high) Issuer Rating does incorporate the assumption of a modest amount of future debt at the Fund level, to support additional assets. On a consolidated basis, DBRS expects EBITDA interest coverage, cash flow-to-debt and debt-to-capital to be in the area of 3.0 times, 14% and 60% to 65%, respectively. On a non-consolidated basis, using the Fund’s expectation of an 80% payout ratio and based on average hydrology, we would expect available cash flow at the Fund level of approximately $170 million to $180 million annually, providing significant preferred share coverage. Due to the nature of the Fund guarantee, preferred share obligations are subordinated to other senior obligations of the Fund; however, they are senior to unitholder distributions and no distributions to unitholders are permitted if preferred share dividends are in arrears.

The ratings are constrained by a number of factors. While having some geographic diversification, there will be volatility in production and financial results due to variable hydrology. The Fund has close relationships with BRP, its majority unitholder. Directly or indirectly, BRP is the manager and administrator of the Fund, owns 50.1% of the Fund’s units and is the counterparty on a large majority of the Fund’s contracts. BRP has entered into a contract with the Ontario Power Authority (rated A (high)) to sell it the Fund’s Ontario-based production, mitigating some of the concern about the Fund’s exposure to BRP. Additionally, while the use of non-recourse asset-level debt segments risk, it also subordinates obligations of the Fund to the substantial asset-level debts.

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

The Preferred Shares, Series 1 of Brookfield Renewable Power Preferred Equity Inc. are guaranteed by Brookfield Renewable Power Fund on a subordinated basis.

The applicable methodology is Rating Utilities (Electric, Pipelines & Gas Distribution), which can be found on our website under Methodologies.

This is a Corporate (Utilities & Independent Power) rating.