Fitch Ratings has assigned a first-time long-term Issuer Default Rating (IDR) of 'BBB+' and a short-term IDR of 'F2' to Brookfield Renewable Partners L.P. (BEP).
Fitch has also assigned a 'BBB+' rating to the unsecured notes at Brookfield Renewable Partners ULC, a 'BBB-' rating to the preferred instruments issued by BEP and Brookfield Renewable Power Preferred Equity Inc., respectively. Additionally, Fitch assigned a 'BBB-' rating to the perpetual subordinated notes and a 'F2' rating to the CP program at Brookfield BRP Holdings (Canada) Inc..
BEP's ratings and Outlook are supported by a large and diversified portfolio of long-term contracted hydro, solar, wind and storage assets. BEP benefits from its affiliation with Brookfield Asset Management (BAM; A-/Stable), which provides additional capital. Fitch expects BEP to be acquisitive and assumes that growth will be executed in a credit supportive manner and that Holdco-only FFO leverage will not sustain above 4x. Fitch calculates BEP's credit metrics on a deconsolidated basis as its assets are largely financed with nonrecourse debt.
KEY RATING DRIVERS
Large and Diversified Portfolio:
BEP's large operating scale and diversification mitigate adversity affecting a single power market and project. BEP is one of the largest global owners of renewable assets, operating 21 GW renewable generation facilities in 26 power markets and 16 countries. BEP's proportionate long-term average (LTA) generation has become more diversified, shifting from 82% hydro in 2017 to 66% hydro as of 1Q 2021 while increasing wind from 16% to 27% and solar from 2% to 5%, respectively. The single largest non-government third-party customer represents approximately 3% of generation in Q1, 2021. Top 15 investments contributed approximately 46% of total FFO as of March 2021.
Long-term Contracts Mitigate Weak Price
BEP's generation output is 85% contracted through 2021 and 81% contracted through 2022. The portfolio has a weighted remaining contract life of 14 years, about average. The majority of BEP's power purchase agreements are with investment-grade entities. 40% of revenue has inflation indexation, supporting a healthy margin. The largest single counterparty is BAM (16% of the contracted generation). Merchant generation is exposed to market price risks. Power prices continue to decline in most markets that BEP operate, except for Colombia. Merchant generation across the hydro portfolio is hedged on a rolling basis leading contracted levels to be over 90% as a given delivery year approaches.
Favorable Generation Profile:
As of March 2021, 66% of BEP's proportionate LTA generation was from hydro. Hydro is a flexible power source as a base load, mid-merit, and peaking generation. Based on simple technology and long useful lives, hydro has low operating cost and ranks high on the dispatch curve. The perpetual nature of hydro provides support for the non-amortizing corporate level debt.
BAM Sponsorship Beneficial:
BAM has approximately $600 billion assets under management and has access to over $77 billion capital including $16 billion core liquidity. With BAM's sponsorship, BEP has unfettered access to private funds and capital markets. A consortium of BAM funds which BEP participated in is generally the acquirer of assets. BAM's $20 billion infrastructure fund has targeted 25% to be invested in renewables. BEP is expected to participate in the new Brookfield Global Transition Fund which will support decarbonization and reducing emissions of existing businesses. BEP has access to a $400 million revolving credit facility from BAM which renews annually.
Approximately 16% of BEP's contracted generation has purchase agreements with BAM, which decreased from 42% in 2017. BAM acted as an intermediary between the project companies, BEP and third party offtakers.
BAM's management fees are assessed based on total capitalization of its investments, causing some cash flow volatility. Due to the exceptional stock performance in the last two years, management fee increased by $140 million, tempering BEP's FFO. BEP has the flexibility to pay management fee in stock if there is not sufficient cash during a quarter.
Investment Grade Projects:
BEP structures its non-recourse project debt to an investment grade standard. Most projects have a restricted payment test based on a minimum debt service coverage ratio (DSCR) of 1.15-1.5x and projects typically post DSCRs well above the minimum. Non-recourse debt has a weighted-average term of 10 years as of March 2021.
Management believes that organic growth could contribute to 6-11% FFO growth per unit, including 1-2% inflation escalation, 2-4% margin improvement and 3-5% from development and repowering. BEP has identified 7GW (BEP's share is 3 GW) in its development pipelines over the next five years.
BEP regularly acquires and monetizes assets to maximize value. The company usually finances acquisitions to target an investment grade rating. It has a long-term investment horizon and is willing and has the financial support and operating experience to revamp assets that were poorly managed to drive long-term value.
BEP's rating stability depend on its ability to finance future acquisitions in a credit supportive manner. In the next five years, BEP is expected to deploy $800 million to $1 billion capital for acquisitions targeting equity return of 12-15% and average funding cost below 5%. The proceeds are expected to largely come from capital recycling and project up-financings, with remaining from new corporate debt and preferreds.
Fitch applies a deconsolidated approach in calculating BEP's credit metrics as BEP finances its operations with primarily non-recourse debt. Holdco-only FFO leverage (gross debt) is estimated to be in the mid to high-3x from 2021-2023. The Holdco-only FFO interest coverage is expected to average 5x in the same period. Fitch uses gross debt in its calculations and assumes some acquisitions.
BEP is strongly positioned relative to its peers in terms of scale and diversification. It owns and operates 21 GW of generation assets which is larger than its peers NextEra Energy Partner LP. (NEP, BB+/Stable), Innergex (BBB-/Stable), Atlantica Yield (AY, BB/Stable), TERP (BB-/Stable) and Orsted A/S (Orsted, BBB+/Stable).
Fitch views BEP's hydro-intensive asset portfolio favorably due to higher margin, low maintenance, long-life span and dispatch flexibility relative to the solar and on-shore wind assets at NEP, Innergex, AY and TERP and off-shore wind assets at Orsted.
BEP's affiliation with BAM is beneficial. NEP benefits from its affiliation with NextEra Energy (A-/Stable), which is the largest renewable developer in the U.S. Aside from the drop down of 990 MWs at IPO, NEP has purchased approximately 4.0 GWs of additional wind and solar assets from NextEra.
BEP and TERP have modestly shorter remaining contract life of 14 years while NEP, Innergex and AY have 15, 15 and 18 years of contract life, respectively. BEP's Holdco-only FFO Leverage is estimated to be in the mid to high 3x range in the next three years which is similar to AY, Innergex and NEP, and stronger than TERP.
Construction of 2,740 MW (814 MW net to BEP) new projects with expected commissioning in the next three years, funded by capital recycling and asset up-financing;
Embedded inflation adjustment factors in PPAs;
Deploy $800 million - $1 billion of acquisitions per year funded by proceeds from capital recycling supplemented with corporate debt.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Holdco-only FFO leverage below 3x on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A growth strategy underpinned by acquisitions or addition of assets that bear material volumetric, commodity, counterparty or interest rate risks, or using excessive recourse-debt financing;
Counterparty or asset underperformance resulting in a material shortfall of expected holdco cash flow versus Fitch's projections;
A material increase in concentration of earnings and cashflows from emerging market economies;
Holdco-only FFO leverage ratio exceeding 4.0x on a sustained basis.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Brookfield Renewable Partners L.P is one of the largest global owners and operators of renewable generation power plants in North America, South America, Europe and Asia with estimated 21 GW of total generation capacity as of March 2021.
DATE OF RELEVANT COMMITTEE
24 June 2021
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on BEP, either due to their nature or the way in which they are being managed by BEP. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING
Brookfield Renewable Partners ULC
LT BBB+ New Rating
Brookfield Renewable Partners L.P. LT IDR BBB+ New Rating
ST IDR F2 New Rating
LT BBB- New Rating
Brookfield BRP Holdings (Canada) Inc.
LT BBB- New Rating
ST F2 New Rating
Brookfield Renewable Power Preferred Equity Inc.
LT BBB- New Rating
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com