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

DBRS Limited (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 confirmation reflects CHD’s fully contracted portfolio with investment-grade counterparties, which minimizes its commodity pricing risk, as well as the financial and operational support of CHD’s indirect owner, TransAlta Corporation (TAC; rated BBB with a Stable trend by DBRS). The confirmation also reflects DBRS’s expectation that the integration between CHD and TAC will remain strong, with TAC indirectly owning over 50% of CHD over the long term (70.3% as of December 31, 2014). A rating differential between TAC and CHD could ultimately result if the level of integration between TAC and CHD weakens significantly, as CHD is viewed on a stand-alone basis. TAC’s rating could be pressured if it significantly increases its exposure to construction and development risk, as well as merchant risk of greenfield projects, and funds new projects with debt. This may not have a material impact on CHD if the Company continues to fully hedge power production through power purchase agreements (PPAs) with investment-grade counterparties and maintains reasonable financial metrics.

CHD’s business risk profile is in the BBB range. As part of the sale to TransAlta Renewables Inc. (TransAlta Renewables) in August 2013, CHD entered into PPAs with TAC for its merchant wind and hydro facilities. As a result, CHD’s portfolio of generating facilities has been fully contracted with investment-grade counterparties at reasonable maturities, which mitigates the Company’s exposure to commodity pricing risk, and reduces the volatility of earnings and cash flow. Re-contracting risk in the near to medium term for the Company remains relatively limited as less than 5% of capacity faces renewal risk over the next ten years. CHD’s key challenge is its renewable resources risk, including changes in wind flows and hydrology. Variability in earnings and cash flows are primarily driven by changes in generation volumes, which are very sensitive to wind and hydrological conditions.

CHD’s key credit metrics are well within the BBB range and are supported by the Company’s historically low debt levels, following TAC’s acquisition of CHD in 2009. In 2014, the Company generated positive free cash flow attributable to its relatively low maintenance capital expenditures requirements in 2014. As DBRS projected, excess cash flow was distributed to TransAlta Renewables through its related party loans with CHD and, to a lesser extent, preferred dividend payments.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Independent Power Producer Industry (August 2014), which can be found on our website under Methodologies.