Morningstar DBRS Downgrades Brookfield Renewable Kwagis Holding Inc. to BBB (low) from BBB, Maintains Negative Trends

DBRS Limited (Morningstar DBRS) downgraded the Issuer Rating of Brookfield Renewable Kwagis Holding Inc. (the Issuer) and the credit rating on the Issuer's Series I Senior Secured Bonds (the Bonds) to BBB (low) from BBB and maintained the Negative trends on both credit ratings. 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 on the Kokish River in British Columbia (the Project). The $175 million Bonds started amortizing in 2024 and will fully amortize by 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 Negative trend).

KEY CREDIT RATING CONSIDERATIONS
The credit rating downgrades and negative trends reflect the Project's continued underperformance in both generation and revenue, primarily because of persistently low water flow resulting from low precipitation in the region. Since its commercial operations date on April 9, 2014, the Project has not met targeted generation and revenue on a cumulative basis, resulting in lower debt service coverage ratios (DSCRs). Over its 10 full years of operation, the Project's annual average generation is 13% below the long-term average generation (LTAG) of 137.1 gigawatts per hour, and cumulative revenue is 16% below the planned revenue. The divergence in revenue from 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. The second SFEA reset is due and will be prorated from May 2025. This will further erode the effective energy price and place additional downward pressure on revenue and cash flow available for debt service. In 2024, generation and revenue were 23% and 16% below the LTAG and revenue targets, respectively, and the DSCR was 1.18 times (x). To May 2025, generation and revenue were 52% and 41% below LTAG and revenue targets, respectively.

Morningstar DBRS updated its rating-case projections to reflect the EPA's second SFEA reset, which the Issuer is currently finalizing with BC Hydro. Morningstar DBRS does not expect the finalized reset to materially differ from the updated forecast. Morningstar DBRS expects the reset to reduce the effective energy price, reducing the minimum DSCR forecast to 1.36x from 1.42x, which also contributed to the downgrade. The debt service reserve account, equal to the next semiannual debt service payment, remains in good standing and may be used to pay principal and interest due under the Bonds if the Project LP's revenues are insufficient to cover debt service amount.

CREDIT RATING DRIVERS
Morningstar DBRS would consider changing the trend to Stable if the Project's performance rebounds from current levels in the coming 12- to 18-month period. Morningstar DBRS may take a further negative credit rating action if the waterflow variability continues to affect the Project's generation, impacting cashflow 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 Factors
Morningstar DBRS considered Climate and Weather Risks as a relevant environmental factor for the Project because of greater hydrology volatility. As a run-of-river hydro power facility on the Kokish River in British Columbia, the Project's performance is dependent on precipitation levels that could impact the waterflow. Materially low waterflows in this region could negatively affect the credit ratings.

There were no Social or 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 Factors in Credit Ratings (May 16, 2025) at https://dbrs.morningstar.com/research/454196

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 principal methodology "Global Methodology for Rating Project Finance" 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 principal methodology "Global Methodology for Rating Project Finance" was considered more important: DSCR (the sole FRA factor).

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

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Project Finance (December 10, 2024), https://dbrs.morningstar.com/research/444393

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
Morningstar DBRS Global Corporate Criteria (February 3, 2025), https://dbrs.morningstar.com/research/447186

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025), https://dbrs.morningstar.com/research/454196

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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

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 dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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