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

DBRS Limited (DBRS Morningstar) confirmed its ratings of BBB (high) with Negative trends on Brookfield Renewable Kwagis Holding Inc.’s (the Issuer) Issuer Rating and Series I Senior Secured Bonds (the Bonds). 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 between the Project LP and British Columbia Hydro and Power Authority (rated AA (high) with a Stable trend by DBRS Morningstar). The Project is a low-elevation run-of-river facility located on the Kokish River on northeastern Vancouver Island.

For the six-and-a-half-year period since the commercial operations date (COD) up to and including December 2020, cumulative generation was 13.5% below long-term average generation (LTAG) and cumulative rev¬enue was 17.2% 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’s debt service coverage ratio (DSCR) was 1.13 times (x). The Project's performance rebounded significantly in 2020 as hydrological conditions improved, exceeding the annual target (for the first time since the COD) at 104.5% of LTAG (compared with 57.0% for 2019) and achieving a DSCR of 2.13x. For the first five months of 2021, the Project continued to outperform the LTAG for the same period by approximately 20%.

In 2020, DBRS Morningstar changed the trend on the ratings to Negative from Stable because of the Project’s generation and revenue underper¬formance since the COD on April 9, 2014, compared with the LTAG and revenue target, resulting in lower DSCRs than the rating case. DBRS Morningstar recognizes that hy¬drological variability for run-of-river projects can be large and that 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 on the ratings 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 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/373262.

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

The principal methodologies are Rating Project Finance (September 1, 2020; https://www.dbrsmorningstar.com/research/366229) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), 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 (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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