DBRS Confirms Brookfield Renewable Kwagis Bonds at A (low)

DBRS Limited (DBRS) has today confirmed its rating of A (low) with 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 Project LP), and secured by all assets of the Project. The Bonds start amortizing at the start of 2024 and fully amortize with the term of the Electricity Purchase Agreement until 2053.

The Project started commercial operations (COD) on April 9, 2014, and generation data are available until the end of March 2016. Cumulative generation since COD was approximately 236 gigawatt hours (GWh), or an average of 118 GWh per year. DBRS notes that, on a cumulative basis, the Project is 14.6% below Long-Term Average Generation (LTAG) and 17.3% below planned revenue. Q2 2016 has had exceptionally low generation caused by low water flow rather than availability issues. The Project achieved COD a few days into Q2 2014, so lower generation at that time (61% below the Q2 2014 plan) is partially attributable to teething issues; however, Q2 2015 performed 66% below plan, which raises some concern. DBRS will closely monitor generation in the coming few months, particularly Q2 2016, to determine whether a reassessment of the Project’s LTAG is warranted in the future. Continued underperformance in generation and revenue may lead to a reassessment, which could result in a negative rating action based on materially diminished credit metrics.

The Independent Engineer’s initial review identified the capital expenditure (capex) likely to occur over the next 40 years, showing levelized and non-levelized capex. The debt service coverage ratio (DSCR) calculation already accounts for operations and maintenance costs, which include labour, supplies and materials; routine repair and maintenance estimates; and other miscellaneous plant expenses; thus, capex consists only of major overhauls typically required well into the forecast period. DBRS notes that the DSCR has originally been projected using levelized capex based on the structure agreed upon with noteholders as per the Indenture. DBRS has also calculated the DSCR based on the non-levelized capex, which shows downward pressure on the DSCR in 2033, 2038, 2048 and 2053 (when the bonds mature) if all capex was spent in that year. The Sponsor, Brookfield Renewable Partners L.P., noted the precise timing and quantum of major capex changes over the course of the Project and that such capex needs well in the future gives them visibility to adequately manage cash flow. Spending can be spread by prepaying some contracts or stockpiling materials years in advance of the actual work. By spreading the capex cost over two to four years (depending on size), the resulting minimum DSCR remains robust at 1.39 times (x) compared with 1.45x in the levelized calculation. As the Sponsor has a long history in hydro projects, DBRS views this approach regarding future capex costs as reasonable. The average DSCR in all cases throughout the life of the Project is 1.70x.

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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.