DBRS Confirms Brookfield Renewable Power Inc. at BBB (high), Trend Stable

DBRS has today confirmed the rating on the Senior Unsecured Debentures and Notes (Notes) of Brookfield Renewable Power Inc. (BRP or the Company) at BBB (high) with a Stable trend. The rating continues to reflect the strength of BRP’s high-quality, long-life and cost-competitive renewable power assets with reasonable geographic diversification. Despite short-term volatility or cyclicality, the supply-and-demand fundamentals of the Company’s market regions could be considered robust over the long term. The prospects for the Company’s environmental-friendly and carbon-free renewable energy assets 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 results and performance in the normal course of the Company’s renewable business, as reflected in a weaker year in 2007 due to lower hydrology, and in 2009 due to declines in energy prices and energy demand. The Company has been able to manage these risks proactively, from maintaining sufficient cash flow liquidity to continually seeking diversification and additional contract protection to stem off the impact of potential downturns.

In line with this strategy, in Q3 2009, the Company sold its directly-held Canadian assets to its majority-owned subsidiary, Brookfield Renewable Power Fund (BRPF or the Fund; rated BBB (high)), in a CAD 945 million transaction (the Transaction, as described in DBRS’s July 6, 2009, press release). The related public issuance of the Fund’s units for the asset purchase allowed the Company to monetize a minority share of its generation assets while keeping its majority ownership and management control. The cash proceeds from the sale bolstered the Company’s liquidity position and partially funded the diversification into infrastructure assets (the Acquisition, as described in DBRS’s November 17, 2009, press release).

The infrastructure portfolio acquired through Brookfield Infrastructure Partner L. P. (BIP) consists of quality assets with long-term contract protection and diverse industries such as electric transmission and distribution systems, natural gas pipelines and ports mainly in the United States, Australia, the United Kingdom and Chile. The acquisition was valued at $837 million. The projected cash flow from these assets should more than offset the effect of the sale of the directly-owned Canadian assets to the Fund. The assets and cash flow of the infrastructure portfolio will account for around 10% of BRP’s total.

To mitigate the power market volatility, BRP continued to seek long-term power purchase agreements (PPAs) at reasonable prices and terms. In Q4 2009, the Company signed a long-term PPA with the Ontario Power Authority (OPA; rated A (high) with a Stable trend) to sell the hydroelectric production it purchases from the Fund’s assets to OPA. This PPA extended average contract duration and increased the average price of BRP’s total asset portfolio. With the OPA-contracted portion, 70% of BRP’s energy productions is under long-term contracts. The non-contracted amount 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.

In addition to hydrology and energy market risk, the rating is constrained by the significant subordination to asset-level debt. The key credit metrics (all DBRS estimates) supporting the rating profile are largely based on BRP from a non-consolidated perspective, with adjusted non-consolidated interest coverage of approximately 3.74 times and non-consolidated cash flow-to-corporate debt of 28%. 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. 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 variable nature of its renewable business and cash flow.

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

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.