DBRS Confirms Canadian Hydro Developers at BBB, Stable

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

Approximately 85% of CHD’s generation capacity is sold under PPAs to creditworthy counterparties rated in the A (high) to AA (high) range, with a production-weighted average term to maturity of approximately 13 years. This has contributed to stable cash flows and key credit metrics for the Company over the past few years. In addition, the completion of the New Richmond wind project in Q1 2013, a 68 megawatt wind projected located in the Gaspé Peninsula in Québec with a total cost of approximately $212 million, is expected to provide steady cash flows over the medium to long term due to its long-dated contract. New Richmond has a 20-year agreement with Hydro-Québec (rated A (high)). An expected increase in earnings and cash flow from New Richmond will likely offset the negative impact of the weak wholesale pricing environment on CHD’s merchant generation capacity (approximately 15% of total generation capacity).

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 20%. Despite the Company’s solid financial profile, DBRS has not raised CHD’s ratings, as the Company remains under the full control of 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Non-Regulated Electric Generation Industry (May 2011), which can be found on our website under Methodologies.