DBRS Confirms Brookfield Renewable Kwagis Bonds at A (low)

DBRS Limited (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. (the Issuer). The Bonds are guaranteed by the Issuer’s project subsidiary, Kwagis Power Limited Partnership (the Guarantor) and secured by all assets of Project LP (the Project). The Bonds fully amortize within the term of the Electricity Purchase Agreement (EPA).

The project has a 40-year EPA with British Columbia Hydro & Power Authority (BC Hydro; rated AA (high) with a Stable trend). The EPA price paid for energy sold under the EPA based on delivery commitment, season and time of day is “Firm” or “Non-Firm” energy. The threshold for what constitutes Firm energy coupled with the other adjustments introduces some volatility regarding the effective realized price and, hence, expected Project revenues. DBRS does not yet have sufficient data to perform a meaningful analysis on the realized price and therefore has relied on the Issuer’s projections and assumptions. More operating data and financial results will be required to perform such analyses.

The Project reached commercial operation on April 9, 2014, and began selling into the grid. Overall, operating performance at December 31, 2014, was below the plan with both generation and revenues about 26% lower. DBRS was only provided with year-to-date operating information and therefore was unable to individually assess the operating performance for Q2 and Q3. Per the Issuer, the Project experienced poor hydrology during Q2 2014 and as planned, nil generation during Q3 2014. For Q4 2014, generation was 5% higher than planned, yet reported revenues were 1.5% lower as a result of a lower all-in realized price from more generation being sold as Non-Firm.

The primary risks for the Project are the hydrology available and the potential volatility in the actual effective realized price introduced under an atypical EPA structure. Hydrology was assessed based on six years of site data and 35 years of nearby water flow data but did not include an assessment of the possible variability in the energy evaluation process. This is not uncommon in hydrology studies reviewed by DBRS. However, DBRS does not have sufficient information to make its own evaluation of how hydrology and, hence, energy production and revenue performance can be expected to vary over the life of the project.

Based on the Issuer’s assumptions, the Project is expected to achieve long-term average annual production of 137 gigawatt-hours (GWh) with a minimum debt service coverage ratio of 1.45 times. The Independent Engineer Review completed by Hatch opined that the project should be capable of achieving the expected average annual net generation of 137 GWh.

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.