DBRS Updates Report on Canadian Hydro Developers, Inc.

DBRS has today updated its report on Canadian Hydro Developers, Inc. (CHD or the Company). The credit quality of CHD is based on the 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).

Key credit metrics and cash flow from operations improved modestly for the period ended June 30, 2012 (H1 2012), relative to H1 2011, given CHD’s highly contracted capacity. 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. However, CHD’s cash flow surplus for H1 2012 declined ($6 million versus $45 million in H1 2011) as the Company continues with the construction of the New Richmond wind project (New Richmond). New Richmond is a 68 MW wind project located in the Gaspé Peninsula in Québec and is estimated to cost $205 million ($78 million spent as of H1 2012). The facility is expected to begin operations in late 2012 and has a 20-year agreement with Hydro-Québec (rated A (high)). Upon completion, New Richmond is expected to provide steady cash flows over the medium to long term, due to the long-dated contract with a creditworthy counterparty.

Since TAC completed its acquisition of CHD in 2009, key credit metrics have improved significantly and CHD’s debt-to-capital now stands at approximately 21%. Despite the Company’s strong financial profile, DBRS has not raised CHD’s ratings, as the Company remains under the full control of the BBB rated TAC. 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’s rating acts as a ceiling to CHD’s rating.

Notes:
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.