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

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. DBRS assesses the credit quality of CHD primarily on a stand-alone basis. As a result, the rating of CHD -- a 64% indirectly owned subsidiary of TransAlta Corporation (TAC; rated BBB with a Negative trend by DBRS) -- was not affected by DBRS’s recent negative rating action on TAC that changed the trends of TAC’s ratings to Negative from Stable.

In October 2015, CHD issued $442 million 3.834% Series 1 Senior Secured Amortizing Bonds due December 31, 2028 (the Project Bond; rated BBB with a Stable trend by DBRS) under the newly created special-purpose entity, Melancthon Wolfe Wind LP (Melancthon). The net proceeds of the Project Bond were largely distributed to CHD’s wholly owned parent company, TransAlta Renewables Inc. (RNW), to fund its growth capital investment project. As a result, CHD’s consolidated debt levels increased by $332 million to approximately $711 million in 2015 from $379 million in 2014. While higher leverage has negatively affected CHD’s financial flexibility, the Company’s key credit metrics have remained within the BBB rating category, based on (1) leverage of 35.7% as at December 31, 2015 (30% to 50% for the BBB rating range), (2) cash flow-to-debt of 17.3% in 2015 (15% to 35% for the BBB rating range) and (3) EBITDA-interest coverage of 5.94 times (x) in 2015 (4.0x to 7.0x for the BBB rating range). DBRS does not expect any further material deterioration in the financial metrics over the next three years. Prior to the Project Bond issuance, CHD had significant financial flexibility within the current rating category -- key credit metrics were in the weak “A”/strong BBB range. Leverage was in the weak “A” rating range, while the other two key metrics, cash flow-to-debt and EBITDA-interest coverage, were in the strong BBB rating range.

CHD’s business risk profile has also weakened following the Project Bond issuance but remained within the BBB range, supported by the following: (1) 100% of the Company’s capacity is contracted under power purchase agreements with investment-grade counterparties and (2) there is no project construction risk. CHD is not expected to be involved with any new project developments. The rating incorporates CHD’s weakened plant and geographical diversification on a non-consolidated basis with the removal of the Melancthon wind assets.

DBRS notes that the Company intends to repay all CHD debentures with non-recourse project-level debt between now and 2018. Once the last debentures mature in June 2018, the Company’s intention is that the CHD indenture program will effectively be terminated. At that time, the only debt within CHD is expected to be project-level debt on several of the assets. As a result, the rating horizon for the CHD Debentures is expected to be less than three years.

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 Independent Power Producer Industry.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.