DBRS Reinstates Public Coverage of Canadian Hydro Developers, Inc.

DBRS has today reinstated public rating coverage of Canadian Hydro Developers, Inc. (CHD or the Company), and confirmed the rating of CHD’s Senior Unsecured Debentures at BBB with a Stable trend. The rating reflects the expectation of stable cash flow generation from CHD’s existing portfolio of assets with long-term power purchase arrangements (PPAs), as well as the support (both financial and operational) of CHD’s indirect owner, TransAlta Corporation (TAC, rated BBB).

CHD’s significant capital expansion phase is largely complete, after increasing generating capacity from 162 megawatts (MW) in 2005 to the current 694MW. With the growth phase now complete, CHD’s EBITDA and cash flow are expected to increase and stabilize in 2010 and 2011 (taking into consideration the break-in periods on newly commissioned assets), providing reasonably consistent credit metrics. Variability will be driven by production, largely the realized wind resource, with a modest level of exposure to power prices given the 14% of capacity that is not under contract. Eighty-six per cent of CHD’s capacity is sold under PPAs with a production-weighted average term-to-maturity of 17 years, largely with high credit-quality counterparties mainly in the A (high) to AA range. The PPAs are expected to provide a high degree of cash flow stability over the longer term; EBITDA-to-senior interest expense is expected to be in the area of 5 times.

TransAlta completed its acquisition of 100% of CHD’s common shares in November 2009, paying a cash price of approximately $750 million for CHD’s equity, plus CHD debt of approximately $875 million. CHD remains a separate subsidiary of TAC. Pre-transaction, CHD’s debt was comprised of $345 million of rated privately-placed debentures and approximately $40 million in project level debts, with the balance in bank debt. Concurrent with the transaction, TAC refinanced all of the CHD bank debt with subordinated intercompany loans, which, given their terms, DBRS views as 100% equity. The debentures and project level debt remain in place. While the TAC subordinated loans significantly reduced the amount of senior debt at CHD, a positive for the senior unsecured debentures (decreasing senior debt to capital from 64% to 22%), DBRS has not raised CHD’s ratings as the provider of the intercompany loans is the BBB-rated TAC, and, while not anticipated, TAC is not prevented from increasing CHD’s senior debt leverage in the future.

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

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas and Pipelines), which can be found on our website under Methodologies.