DBRS Confirms Brookfield Renewable Kwagis Bonds at A (low)

DBRS has today confirmed its rating of A (low) with a Stable trend on the Series 1 Senior Secured Bonds (the Bonds) issued by Brookfield Renewable Kwagis Holding Inc. (Kwagis Holding or the Issuer), guaranteed by the Issuer’s project subsidiary, Kwagis Power Limited Partnership (ProjectCo or the Guarantor), and secured by all assets of ProjectCo. ProjectCo is a single-purpose entity created to own, develop, construct and operate a 45 megawatt (MW) run-of-river hydroelectric power generating facility on the Kokish River near Port McNeill, British Columbia (the Project). The Project is indirectly owned by Brookfield Renewable Energy Partners (BREP, rated BBB (high) with a Stable trend) (75%) and the ‘Namgis First Nation (25%). The rating benefits from a 40-year Electricity Purchase Agreement (EPA) with British Columbia Hydro & Power Authority (BC Hydro, rated AA (high) with a Stable trend). The Bonds will be fully amortized within the term of the EPA.

The total project cost including interest during construction is $208 million, financed with $175 million debt (84% leverage) and $33 million in equity. The total budget includes a cash-funded project contingency of $10 million, a $6 million contractor contingency, a six-month debt service reserve and a capital expenditure reserve. Based on the monthly report issued in November 2013, construction progress to date has been largely on schedule and on budget. Construction is approximately 89% completed as per the invoiced amount. Completion continues to be expected by the end of March 2014. The EPA allows a minimum one-year long-stop date (extendible to 2.5 years in certain circumstances). The turbine deliveries, which were viewed as a challenge for on-schedule completion, have been completed with the last two rotors and two stators moved from the storage in Vancouver to the Project site recently. A severe rain storm in Q3 2013 caused minor delays in certain head pond, intake, and penstock areas but is not expected to affect the overall schedule.

Construction period risk had been considered low to moderate when the rating was initially assigned in 2012. Risk level has been reducing as construction progressed as planned. The contractor is Peter Kiewit Infrastructure Co. (PKI) under a fixed-price engineering, procurement and construction contract guaranteed by Kiewit Construction Company, a high-credit-quality counterparty, with a limit of liability equal to 100% of the construction contract price. PKI has successfully completed similar and larger hydroelectric power generating facilities in British Columbia. The independent engineer (IE), Hatch Ltd., considers the construction schedule and budget to be reasonable. The site benefits from existing access roads and is not remote or subject to winter shutdown, which is favourable for on-time, on-budget completion. Construction period risk is considered consistent with the A (low) rating.

Post-completion, the operating phase is expected to achieve long-term average annual production of 137 gigawatt-hours (GWh) with a minimum debt service coverage ratio (DSCR) of 1.45 times (x). The Kokish River hydrology is characterized by a low elevation, high precipitation water flow distinct from a snow-melt spring-time peak water flow. Hydrology has been assessed based on six years of site data and 35 years of nearby, highly correlated, water flow data. The lowest hydrology year trough for that dataset is equivalent to a production trough that is 22% below the long-term average annual production. The IE has reviewed the hydrology data, assessed the methodologies for water flow measurement, data collection and correlation, and has confirmed that the Project will be capable of achieving an average annual net generation of 137 GWh.

BREP is an experienced owner and operator of hydro assets, with 193 hydropower facilities across 69 river systems in Canada, the United States, and Brazil. In the province of British Columbia, BREP owns and operates five hydro stations with installed capacity of 128 MW. The completed project will be operated by Brookfield Power Services Inc. (BPSI; and together with BREP, Brookfield) pursuant to a 40-year, pass-through Management Operation and Maintenance Agreement. Hydro assets typically have low operating costs and low operating risk if properly maintained, with useful lives in excess of 50 years. DBRS considers BPSI to be a capable operator with a proven track record based on other rated projects.

As operating risk is low, the primary risk after construction is the water resource and the risk of steep decline in hydrology. DBRS considers the minimum DSCR at 1.45x sufficient for the maximum historical downside hydrology with a 35-year trough of 22%. The project economics can withstand hydrology that is 29% below long-term average generation, annually for forty years. This is a rather theoretical break even calculation as the possibility of 40 consecutive years of hydrology below the maximum trough is considered by DBRS to be an exceedingly remote possibility and of negligible risk. Giving effect to the debt service reserve, the Project can withstand a single-year decline in hydrology of 50% below long-term average generation. This level of resilience is considered consistent with an A (low) rating.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Project Finance, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.