DBRS Confirms Canadian Hydro Developers, Inc. at BBB, Stable Trend

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 owner, TransAlta Corporation (TAC, rated BBB with a Stable trend).

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 695 MW (excluding New Richmond). 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 17% of capacity is not under contract. 83% of CHD’s capacity is sold under PPAs with a production-weighted average term to maturity of approximately 14 years, largely with high credit quality counterparties rated in the A (high) to AA (high) range. The PPAs are expected to provide a high degree of cash flow stability over the longer term.

Since TAC completed its acquisition of CHD in 2009, coverage metrics have increased significantly and CHD’s senior debt-to-capital now stands at 19%. Despite these strong financial metrics, 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%). Due to this flexibility, TAC acts as a ceiling (currently BBB) to CHD’s rating.

The Bone Creek hydro facility, located in British Columbia, commenced operations in 2011. This project has added 19 MW of capacity and CHD has arranged a 20-year purchase-power agreement expiring June 1, 2031, with British Columbia Hydro & Power Authority (BC Hydro, rated AA (high)). In late March 2011, CHD received approval from the Government of Québec to begin construction of the New Richmond (68 MW) wind project, located in the Gaspé Peninsula. Costing an estimated $205 million, the facility is expected to begin operations in late 2012 and has a 20-year agreement with Hydro-Québec Distribution (Hydro-Québec, rated A (high)).

These two aforementioned projects remain consistent with CHD portfolio of assets and will provide steady cash flows over the medium to long term due to their long-dated contracts with credit worthy counterparties.

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.