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

DBRS Limited (DBRS) has today confirmed the rating of the Senior Unsecured Debentures (CHD 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, an indirect 64%-owned subsidiary of TransAlta Corporation (TAC; rated BBB (low) with a Stable trend by DBRS), is not affected by DBRS’s recent negative rating actions on TAC wherein the company was downgraded to BBB (low) from BBB and the trends were changed to Stable from Negative.

In June 2016, CHD issued approximately $159 million of non-recourse Senior Secured Amortizing Bonds (the New Richmond Bonds) under the newly created special-purpose entity New Richmond Wind L.P. (New Richmond). The New Richmond Bonds bear interest at a rate of 3.963% and mature on June 30, 2032. The net proceeds of the New Richmond Bonds were distributed to CHD’s wholly owned parent company, TransAlta Renewables Inc. (RNW), to fund its growth capital investment program. In July 2016, CHD also acquired Western Sustainable Power Inc. (WSP) from RNW for a total consideration of $327 million. The acquisition was fully funded by the issuance of common shares of the Company. WSP has net wind-generating capacity of approximately 353 megawatts based in Alberta and has a long-term power purchase contract with TAC and ENMAX Corporation (rated A (low) with a Stable trend by DBRS).

The WSP acquisition increases CHD’s counterparty risk, as a greater portion of revenues is generated from TAC, which has a lower investment-grade rating. However, a majority of CHD’s capacity continues to be contracted to counterparties with strong investment-grade ratings, ranging from A (low) to AA (high). Consequently, CHD’s business risk profile is modestly weak but remains 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’s consolidated debt levels increased by $82 million to approximately $793 million in 2016 from $711 million in 2015. The impact of the New Richmond Bonds on consolidated debt was partially offset by scheduled debt repayments and $10 million of prepayments under the CHD Debentures. Incremental cash flow from the WSP acquisition has also offset the impact of increased interest expense stemming from the issuance of the New Richmond Bonds. As a result, overall key credit metrics have remained in the weak BBB-rating range as follows: (1) consolidated cash flow-to-debt of 15.3% (versus 15.0% to 35.0% for the BBB range); (2) consolidated EBITDA-to-interest of 4.47 times (x) (versus 4.00x to 7.00x for the BBB range); and (3) consolidated debt-to-capital of 35.0% (versus 30.0% to 50.0% for the BBB range). DBRS expects that with the scheduled debt repayments and full-year impact of the WSP acquisition, key credit metrics are likely to improve modestly in 2017 but will remain in the weak BBB-rating range.

CHD’s non-consolidated key credit metrics (calculated by removing all project-financed asset book values from CHD and limiting project cash flow to distributions after principal, interest payments and capital investment) have remained relatively unchanged, as incremental cash flow from the WSP acquisition has largely offset the impact of New Richmond financing.

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 principal methodology is Rating Companies in the Independent Power Producer Industry, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS did have access to the accounts and other relevant internal documents of the rated entity or its related entities.