DBRS Places Brookfield Renewable Energy Partners L.P. Under Review – Developing Following ISAGEN Acquisition Announcement

DBRS Limited (DBRS) has today placed the BBB (high) Issuer Rating, Pfd-3 (high) Class A Preferred Limited Partnership Units rating, and all related ratings of Brookfield Renewable Energy Partners L.P. (BREP or the Company) Under Review with Developing Implications. These rating actions follow BREP’s announcement that the Company and its institutional partners have committed to acquire a 57.6% controlling interest in ISAGEN S.A. E.S.P. (ISAGEN) for total considerations of approximately $2.2 billion (the Acquisition). The Acquisition will initially require an equity commitment of $243 million net to BREP (approximately a 9% interest in ISAGEN), with the remainder primarily funded by BREP’s institutional partners. The Acquisition is expected to close on January 26, 2016. As part of the Acquisition, two mandatory tender offers (MTO) will also be provided to all remaining shareholders of ISAGEN within six months after closing of the initial investment. This could increase BREP’s equity commitment by approximately $517 million if all remaining ISAGEN shares are tendered, which would bring BREP’s interest in ISAGEN to approximately 25%. BREP is expected to initially fund its $243 million equity commitment with $1.2 billion of available liquidity (comprising available credit facilities and cash on hand). The additional MTO commitment is expected to initially be funded with a $500 million acquisition facility and existing liquidity. The rating actions largely reflect the current uncertainty with the final MTO commitment net to BREP and the Company’s permanent financing strategy for the Acquisition. The Acquisition is not expected to have a significant impact on the Company’s business risk profile.

BREP’s business risk profile is underpinned by its geographically diversified and largely contracted portfolio. The net effect of the Acquisition on BREP’s business risk profile is viewed as modestly negative by DBRS but is not expected to significantly affect the overall business risk assessment of BREP. ISAGEN is Colombia’s third-largest power producer, with 3,032 megawatts (MW) of installed capacity, and owning and operating six hydroelectric plants (90% of installed capacity) and one uncontracted thermal plant (10% of installed capacity) with an average facility age of 18 years. Average annual generation approximates 15,000 gigawatt hours. BREP’s net interest in ISAGEN is expected to initially account for approximately 4% of BREP’s proportionate generation, potentially increasing to approximately 10% assuming all remaining ISAGEN shares are tendered. DBRS notes that although the Acquisition provides the Company with further geographic diversification and generation growth into a new power market, political and country risk associated with Colombia is viewed to be relatively higher than existing operations (approximately 75% of current generation in North America). The Acquisition also introduces some foreign exchange risk, which is expected to be partially mitigated by the Company’s hedging strategy. In terms of the production profile, DBRS notes that although approximately 80% of ISAGEN’s production is contracted in 2016, contract terms are typically for two to five years versus BREP’s weighted-average contract duration of 17 years and contracted status of approximately 89% in 2016. DBRS expects the Company to continue to maintain a contracted profile of over 80% and an adequate contract duration on a pro forma basis to support its current rating. As such, the Acquisition alone is not expected to significantly change the Company’s current business risk assessment.

BREP’s financial risk profile is based on its deconsolidated key credit metrics. The Acquisition (including the MTO commitment), combined with the 292 MW Pennsylvania hydroelectric portfolio acquisition (the Pennsylvania Acquisition) expected to close in Q1 2016 (see DBRS press release dated October 9, 2015), have increased the funding pressure on the Company’s deconsolidated balance sheet over the near term as the Company finalizes its permanent financing alternatives for these growth initiatives. Pro forma the (1) $243 million initial investment in the Acquisition, (2) $224 million equity commitment for the Pennsylvania Acquisition, (3) CAD 175 million Preferred LP Units issuance in December 2015 and (4) $135 million of incremental proceeds from the Bear Swamp refinancing in October 2015, BREP’s deconsolidated debt-to-capital was approximately 25% as of September 30, 2015. Assuming the MTO is fully tendered, the $517 million equity commitment would result in a pro forma deconsolidated debt-to-capital of approximately 28%. DBRS notes that BREP’s ratings reflect the Company’s history of prudently financing its growth initiatives to maintain its deconsolidated key credit metrics at a level that is commensurate with the BBB (high) rating category, which has included a mix of equity, preferred shares, asset divestitures and debt. In its review, DBRS will assess BREP’s permanent financing plan and the impact on the Company’s deconsolidated key credit metrics. Upon final review, if the Company prudently finances the Acquisition in a way that its deconsolidated debt-to-capital remains around the 20% threshold over time, and other deconsolidated credit metrics, such as cash flow-to-debt and interest coverage ratios, remain supportive of the current rating, DBRS will likely confirm BREP’s ratings. However, if the Company finances the Acquisition in such a way that its non-consolidated debt-to-capital structure exceeds 20% significantly on a sustained basis and its other non-consolidated credit metrics deteriorate significantly without corrective action within a reasonable time frame, then a negative rating action is likely to occur.

DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status once the equity commitment (pending MTO clarity) and permanent financing details are known.

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

The Senior Unsecured Debentures and Notes of BRP Finance ULC and the Class A Preference Shares of Brookfield Renewable Power Preferred Equity Inc. are guaranteed by Brookfield Renewable Energy Partners L.P.

The applicable methodology is Rating Companies in the Independent Power Producer Industry, Rating Holding Companies and Their Subsidiaries, Preferred Share and Hybrid Criteria for Corporate Issuers, and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.