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

DBRS has today confirmed the rating of the Senior Unsecured Debentures and Notes (the 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 and contract protection. Despite short-term volatility or cyclicality of hydrology and power prices, the long-term prospects for the Company’s environment-friendly and carbon-free renewable energy assets remain favourable, given continuing trends of rising energy demand and 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 of the Company’s renewable business, as reflected in the weaker years of 2010 and 2007 due to lower hydrology, and in 2009 due to declines in energy prices and 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.

The 2010 annual financial statements are the Company’s first annual statements under the International Financial Reporting Standards (IFRS). The most noticeable impact is the revaluation of power generation assets from cost-based accounting to a discounted cash flow model with main assumptions such as power market prices, long-term average hydrology and production, operating expenses and capital expenditures, inflation rate and discount rate.

The market-based valuation approach also affected the reported book value of financial contracts, the value of which logically moves in the opposite direction of value of the power generation assets. These balance sheet items will tend to be more volatile as they are subject to annual revaluation to reflect the changing market environment. The new valuation approach could also be viewed as more subjective and could be overly sensitive to certain assumptions or estimates. For instance, the Company disclosed that 100 basis points of change in the discount rate (or a change of approximately 14%, given a discount rate of 7%) in the power asset valuation model could cause the value of the property, plant and equipment (PPE) to change by about 20%. However, given the long-life nature of the Company’s power generation assets and the unique features of the renewable power generation business, the discounted cash flow approach may provide a more relevant picture of the Company’s business and asset base.

This higher asset valuation, with the related increase in equities, resulted in a material reduction in the adjusted debt-to-capital ratio, from 68% to 42%. However, DBRS will continue to focus on coverage ratios as a gauge of the debt capacity and payment strength of the Company as a going concern. In addition, depreciation expenses are significantly higher and also more volatile, largely as a result of the increase in power generation asset value under IFRS.

In addition to hydrology and energy market risk, the rating is constrained by the structural subordination of the corporate level borrowings 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. BRP has repeatedly stated that its capital management objective is to maintain an investment-grade credit rating with prudent use of leverage to ensure access to incremental borrowings for new growth initiatives. DBRS expects future material acquisitions or new constructions 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 energy business and cash flow.

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

The applicable methodology is Rating Companies in the Non-Regulated Electric Generation Industry, which can be found on our website under Methodologies.