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

DBRS Limited (DBRS Morningstar) changed the trend 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 ratings at BBB (high). 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 (BC Hydro; rated AA (high) with a Stable trend by DBRS Morningstar).

The trend change reflects the Project’s generation and revenue underper¬formance 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).

Additionally, DBRS Morningstar updated its rating-case projections to reflect the EPA's first Seasonal Firm Energy Amount reset, which the Issuer is currently finalizing with BC Hydro. DBRS Morningstar does not expect the finalized reset to materially differ from the updated forecast. DBRS Morningstar expects the reset to reduce the effective energy, reducing the minimum DSCR forecast to 1.42 times (x) from 1.45x, which also contributed to the trend change.

For the six-year and one-quarter period since COD up to and including June 2020, cumulative generation is 17.2% below LTAG and cumulative rev¬enue is 20.6% below 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, especially during H1 2019. As a result, generation and revenue were approximately 43% below LTAG and revenue targets and the resulting period DSCR is 1.13x. The Project's performance rebounded in H1 2020 as hydrological conditions improved, achieving 90% of LTAG for H1 2020 (compared with 44% for H1 2019) and a DSCR of 2.29x.

DBRS Morningstar recognizes that hy¬drological variability for run-of-river projects can be large and patterns can only be statistically significant over longer periods of time. DBRS Morningstar will continue to monitor the Project’s performance and may change the trend or take further rating actions. DBRS Morningstar may take a negative rating action if there is a sustained deterioration in Project performance and coverage ratios, but may take a positive rating action if the Project overperforms for a sustained period with commensurate coverage ratios.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Project Finance (August 21, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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 info@dbrsmorningstar.com.

For more information on this credit or on this industry visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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