DBRS Confirms Brookfield Renewable Power at BBB (high)

DBRS has today confirmed the Senior Unsecured Debentures and Notes rating of Brookfield Renewable Power Inc. (BRP or the Company) at BBB (high), with a Stable trend. This action follows today’s announcement that BRP intends to sell substantially all of its renewable generating facilities in Canada with a total capacity of 387 MW to its 50.01% owned Great Lakes Hydro Income Fund (the Fund, rated STA-2 (high)). BRP will also amend two existing power purchase arrangements (PPAs) under which it acquires power from two of the Fund’s generating assets, and will provide a price guarantee in connection with the bulk of the transferred assets.

Total consideration payable by the Fund to BRP is $945 million, to be funded with the net proceeds from the sale of $760 million of Fund units, and a $200 million senior unsecured note to BRP. BRP will subscribe for 50.01% of the $760 million equity offering in order to maintain its current ownership percentage. Initial cash proceeds to BRP will be approximately $365 million, with an additional $200 million when the note matures.

The 349 MW Great Lakes Power Limited (GLPL) generating facility represents over 90% of the 387 MW of existing capacity being sold to the Fund. In addition to the sale of assets, BRP will guarantee the price GLPL receives from its energy output and sales for an initial fixed price of $68/MWh until 2029. BRP will also increase the contractual price (to $68/MWh) under which it acquires output from two of the Fund’s existing assets, Mississagi Power Trust (Mississagi, rated A (low)) and Lievre Power L.P. (Lievre, rated A (low)). The contracted prices provided by BRP to GLPL, Mississagi and Lievre will increase the Company’s exposure to market price risk, particularly considering the low level of power prices currently seen in the market. However, this added risk is largely mitigated by four primary considerations: 1) BRP’s hedging strategy. Approximately 50% of BRP’s long-term average generation is contracted on a long-term basis, with an additional 25% to 30% typically sold under shorter-term financial contracts. BRP prudently does not hedge 100% of total production given the inherent variability of hydrology. As at March 31, 2009, BRP had 82% of its expected total generation sold for the remainder of 2009 at an average price of US$67/MWh, and 71% for 2010 at US$72/MWh. DBRS does not expect BRP to deviate from its traditional hedging patterns. Additionally, while the $68/MWh price is much higher than current spot pricing, the price is not out of line on a longer-term basis; 2) As a result of operating flexibility in delivering power during peak hours, the assets typically realize a higher-than-all-hour-average price as well as ancillary service revenue which is included in the rate; 3) The significant Transaction value to be realized by BRP, which will initially receive approximately $365 million in cash, the $200 million senior secured note and additional Fund units with a current market value of approximately $380 million. The full amount of the Transaction consideration is roughly equivalent to all of BRP’s currently outstanding corporate-level debt. It is DBRS’s expectation that over time BRP will re-invest the Transaction’s cash proceeds into cash-flow producing power assets and; 4) BRP will acquire a sufficient amount of the Fund’s unit offering to retain its current 50.01% ownership in the Fund. Thus, if BRP were in a position where it was selling any of the GPLP, Mississagi or Lievre power for a price less than the contracted $68/MWh, the Company would effectively be capturing half of the upside paid to the Fund, by virtue of its receipt of distributions of the Fund, as BRP will remain the 50.01% owner of the Fund.

The Transaction, expected to close in the third quarter of 2009, is subject to closing conditions and necessary regulatory approvals, including the Fund’s minority unitholders.

BRP’s consolidated financial profile is not expected to be materially changed as a result of the Transaction as the Company will continue to consolidate the Fund’s results. On a non-consolidated basis, while BRP would lose a modest amount of operating cash flow from the sale of the physical generating assets, and will take on additional price exposure through the additional/amended power purchase agreements with certain of the Fund’s assets, these challenges are viewed as largely offset by the considerable Transaction consideration to be received, the expectation of BRP continuing with a prudent hedging strategy, and the Company maintaining its ownership position in the Fund.

In a separate action unrelated to the Transaction, DBRS has discontinued BRP’s Commercial Paper rating. The commercial paper program has not historically been utilized are there is no commercial paper currently outstanding. BRP’s liquidity is adequately supported by its cash generating ability and $350 million in bank lines.

Notes:
All figures are in Canadian 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 rating.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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