Morningstar DBRS Changes Trends on Brookfield Renewable Kwagis Holding Inc. to Negative from Stable, Confirms Credit Ratings at BBB

DBRS Limited (Morningstar DBRS) changed the trends on the Issuer Rating and the Series I Senior Secured Bonds (the Bonds) rating of Brookfield Renewable Kwagis Holding Inc. (the Issuer) to Negative from Stable and confirmed the credit ratings at BBB. The Issuer's project subsidiary, Kwagis Power Limited Partnership (the Project LP), guarantees the Bonds, which 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 started 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 (BC Hydro; rated AA (high) with a Stable trend by Morningstar DBRS).

KEY CREDIT RATING CONSIDERATIONS
The trend change reflects the Project's generation and revenue underperformance since the commercial operations date (COD) on April 9, 2014, compared with the long-term average generation (LTAG) and revenue target, resulting in generally lower debt service coverage ratios (DSCRs). The next firm energy adjustment anniversary is in 2025. Although not expected in the base-case forecast, Morningstar DBRS notes that if generation until then is weak, there is risk of further erosion in the effective energy price, which could lead to a negative rating action.

Since COD, the Project's generation and revenue have generally been lower than originally modelled at financial close. In 2023, generation and revenue were 13% and 9% below the LTAG and revenue targets, respectively. Cumulative generation and cumulative revenue until YE2023 were 14% and 16% below their modelled forecasts at financial close, respectively. The divergence in revenue from the target is partially the result of the EPA's first reset of the seasonal firm energy amount (SFEA) in mid-2020, which eroded the effective energy price. In 2020, Morningstar DBRS updated its credit rating-case projections to reflect the SFEA reset, reducing the minimum forecast DSCR to 1.42 times (x) from 1.45x. The Morningstar DBRS-adjusted DSCR for 2023 was 1.84x.

Morningstar DBRS recognizes that hydrological variability for run-of-river projects can be large and that patterns can become statistically significant over longer periods of time. Morningstar DBRS continues to closely monitor this project for volatility in the waterflow.

CREDIT RATING DRIVERS
Morningstar DBRS could take a positive credit rating action if there was a sustained period of higher generation with the expectation that it could continue. Morningstar DBRS could take a negative credit rating action if the waterflow variability continues to affect the project's generation, leading to lower revenue and cash flows available for debt service.

FINANCIAL OUTLOOK
The DSCR until 2023 was interest only; the Bonds started amortizing in 2024, with semi-annual payments in June and December every year until 2053. This could put downward pressure on the DSCR if generation levels are not at par with the LTAG, resulting in lower revenue and cash flow available for debt service.

CREDIT RATING RATIONALE
The credit rating is anchored by the long-term contracted revenues with a highly rated off-taker and mature and proven technology. The main challenges include price volatility under the EPA with BC Hydro and hydrology risk.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
As a run-of-river hydro power facility in British Columbia, Climate and Weather risk is a relevant ESG factor for the Project because of greater hydrology volatility. Materially low waterflows in this region could negatively affect the credit ratings.

There were no Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024), https://dbrs.morningstar.com/research/427030.

RATING DRIVER AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Rating Driver Factors
In the analysis of the Issuer, the Rating Driver factors listed in the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of the Issuer, the following FRA factor listed in the methodology was considered more important: DSCR (the only applicable FRA factor).

(C) Weighting of the Rating Drivers and the FRA
In the analysis of the Issuer, the FRA carries greater weight than the Rating Drivers.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Project Finance (April 15, 2024), https://dbrs.morningstar.com/research/431188

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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