DBRS Confirms Canadian Hydro Developers at BBB, Trend Stable

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

As was expected, EBITDA and cash flows have improved dramatically since CHD completed its significant capital expansion, during which generating capacity increased from 162 megawatts (MW) in 2005 to the current 713 MW. This, combined with the deleveraging that has occurred since TAC’s acquisition of CHD in 2009, has resulted in a significant improvement in credit metrics. Based on its current asset platform, CHD’s EBITDA and cash flow are expected to stabilize in the range of recent levels, with variability driven by production (largely the realized wind resource). It should be noted that a modest level of exposure to power prices exists, given that 14% of capacity 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 approximately 15 years, largely with high credit-quality counterparties rated in the A (high) to AA range. The PPAs are expected to provide a high degree of cash flow stability over the longer term.

When TAC completed its acquisition of CHD in 2009, it refinanced all of the CHD bank debt with almost $600 million of subordinated intercompany loans (which DBRS treated as 100% equity); TAC subsequently converted the subordinated intercompany loan balance to equity in 2010. While CHD’s senior debt-to-capital now stands at 17%, and coverage credit metrics have also improved significantly, DBRS has not raised CHD’s ratings as the Company remains under the full control of the BBB-rated TAC, and TAC is not prevented from increasing CHD’s senior debt leverage in the future, up to various covenant levels under the rated debentures (including debt-to-assets not exceeding 65%). Additionally, there is a material amount of goodwill ($391 million) on CHD’s balance sheet.

Earlier this year, CHD commissioned its 19 MW Bone Creek facility, a contracted hydroelectric facility. TAC also announced earlier in 2011 that it is proceeding with construction of the New Richmond wind project, a 66 MW facility in Québec.

New Richmond was a legacy CHD development project and it is expected that CHD will own the project through development and operation. New Richmond has an expected cost of $205 million, a 20-year contract with Hydro-Québec (rated A (high)), and an expected completion date in late 2012. While CHD now generates material cash flows from its existing asset base, DBRS expects New Richmond to be funded through a combination of internally generated cash flows and an intercompany credit line with TAC, which ranks pari passu with the senior unsecured debentures.

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

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