DBRS Morningstar Confirms Ratings on Brookfield Renewable Kwagis Holding Inc. and Maintains Negative Trends

DBRS Limited (DBRS Morningstar) confirmed its ratings of BBB (high) and maintained the Negative trends on Brookfield Renewable Kwagis Holding Inc.’s (the Issuer) Issuer Rating and on the Series I Senior Secured Bonds (the Bonds) rating. The Bonds are guaranteed by the Issuer’s project subsidiary, Kwagis Power Limited Partnership (the Project LP), and are secured by all the assets of the 45-megawatt run-of-river hydroelectric power-generating facility in British Columbia (the Project). The $175 million Bonds start amortizing in 2024 and fully amortize in 2053 at the end of the Electricity Purchase Agreement (EPA) between the Project LP and British Columbia Hydro and Power Authority (rated AA (high) with a Stable trend by DBRS Morningstar).

For the eight-year and three-month period since the commercial operations date (COD) up to and including June 2022, the Project has not met targeted generation and revenue on a cumulative basis. The Project's cumulative generation was 10.7% below the long-term average generation (LTAG), and cumulative revenue was 15.7% below the planned revenue. In 2019, the Project's electricity generation was particularly low because of drought as well as weak precipitation and inflows in British Columbia. As a result, 2019 generation and revenue were approximately 43% below the LTAG and revenue targets, and the resulting period’s debt service coverage ratio (DSCR) was 1.13 times (x). The Project's performance rebounded significantly in 2020 and 2021 as hydrological conditions improved, with generation exceeding the annual target (for the first time since the COD) at 104.5% and 109.4% of the LTAG, respectively, but revenue was about 1.0% shy of the target in both years. Moreover, for the six months ended June 2022, generation met the LTAG goal, but revenue was 10.8% below target. The interest-only DSCRs of 2.13x and 2.06x in 2020 and 2021, respectively, reflect the improvement in generation and revenue. However, the divergence in revenue from target despite exceeding the LTAG goal is the result of the EPA's first reset of the Seasonal Firm Energy Amount (SFEA), in mid-2020, which has eroded the effective energy price. In 2020, DBRS Morningstar updated its rating-case projections to reflect the SFEA reset, reducing the minimum forecast DSCR to 1.42x from 1.45x. The eroded energy price puts downward pressure on the ratings, hence the Negative trends, especially as we approach 2024 when the Bonds begin to amortize.

DBRS Morningstar recognizes run-of-river projects can have hydrological variability and patterns can only be statistically significant over longer periods of time. DBRS Morningstar will continue to monitor the Project’s performance and may take a negative rating action if the DSCR remains pressured by the erosion of the energy price as well as hydrology/generation. A positive rating action is unlikely in the near to medium term.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance (ESG) factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929.

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

The principal methodologies are Rating Project Finance (August 18, 2021; https://www.dbrsmorningstar.com/research/383185) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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 under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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