DBRS Assigns Provisional Rating of A (low) to Brookfield Renewable Kwagis Bonds

DBRS has today assigned a provisional rating of A (low) with a Stable trend to the Series 1 Senior Secured Bonds (the Bonds) to be issued by Brookfield Renewable Kwagis Holding Inc. (Kwagis Holding or the Issuer), guaranteed by the Issuer’s project subsidiary, Kwagis Power Limited Partnership (ProjectCo or the Guarantor), and secured by all assets of ProjectCo. ProjectCo is a single-purpose entity created to own, develop, construct and operate a 45 megawatt (MW) run-of-river hydroelectric power generating facility on Kokish River near Port McNeill, British Columbia (the Project). The Project will be indirectly owned by Brookfield Renewable Energy Partners (BREP, rated BBB (high) with a Stable trend) (75%) and the ’Namgis First Nation (25%). The rating benefits from a 40-year Electricity Purchase Agreement (EPA) with British Columbia Hydro & Power Authority (BC Hydro, rated AA (high) with a Stable trend).

The total project cost including interest during construction is $208 million, financed with $175 million debt (84% leverage) and $33 million in equity. The Bonds fully amortize after a ten-year interest-only period (excluding 1.75 years during construction). The total cost includes a cash-funded project contingency of $10 million, a $6 million contractor contingency, a cash (or LC) funded six-month debt service reserve and a capital expenditure reserve. Expected long-term average annual production is 137 gigawatt-hours (GWh) with a minimum debt service coverage ratio (DSCR) of 1.45 times (x) and average DSCR of 1.71x. Construction began in May 2012 with a target commercial operations date of March 31, 2014, and a minimum one-year long-stop date (extendible to 2.5 years in certain circumstances). As of October 2, 2012, the Project is forecast to have spent 34% of the total project cost.

Construction period risk is considered low to moderate. The contractor is Peter Kiewit Infrastructure Co. (PKI) under a fixed-price engineering, procurement and construction (EPC) contract guaranteed by Kiewit Construction Company (KCC), a high-credit-quality counterparty, with limit of liability equal to 100% of the construction contract price. PKI has successfully completed similar and larger hydroelectric power generating facilities in British Columbia. The independent engineer (IE), Hatch Ltd., considers the construction schedule and budget to be reasonable. The site benefits from existing access roads and is not remote or subject to winter shutdown, which is favourable for on-time, on-budget completion. Construction period risk is considered consistent with the provisional A (low) rating.

The Kokish River hydrology is characterized by a low elevation, high precipitation water flow as distinct from a snow-melt spring-time peak water flow. Hydrology has been assessed based on six years of site data and 35 years of nearby, highly correlated, water flow data. The lowest hydrology year trough for that dataset is equivalent to a production trough that is 22% below the long-term average annual production. The IE has reviewed the hydrology data, assessed the methodologies for water flow measurement, data collection and correlation, and has confirmed that the Project will be capable of achieving an average annual net generation of 137 GWh.

BREP is an experienced owner and operator of hydro assets, with 171 hydropower facilities across 68 river systems in North America and Brazil. In the province of British Columbia, BREP owns and operates five hydro stations with installed capacity of 136 MW. The completed project will be operated by Brookfield Power Services Inc. (BPSI) pursuant to a 40-year, pass-through Management Operation and Maintenance Agreement. Hydro assets typically have low operating costs and low operating risk if properly maintained, with useful lives in excess of 50 years. DBRS considers BPSI to be a capable operator with a proven track record based on other rated projects.

As operating risk is low, the primary risk after construction is the water resource and the risk of steep decline in hydrology. DBRS considers the minimum DSCR at 1.45x sufficient for the maximum historical downside hydrology with a 35-year trough of 22%. The project economics can withstand hydrology that is 29% below long-term average generation, annually for 40 years. This is a rather theoretical breakeven calculation as the possibility of 40 consecutive years of hydrology below the maximum trough is considered by DBRS to be an exceedingly remote possibility and of negligible risk. Giving effect to the debt service reserve, the Project can withstand a single-year decline in hydrology of 50% below long-term average generation. This level of resilience is considered consistent with an A (low) rating.

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

The applicable methodology is Rating Project Finance, which can be found on our website under Methodologies.