-- We are lowering our long-term corporate credit and senior unsecured
debt ratings on TransAlta Corp. to 'BBB-' from 'BBB'.
-- We are also lowering our global scale preferred stock rating on the
company to 'BB' from 'BB+', and our Canada scale rating to 'P-3' from
-- The cash flow related to a recently announced contract at TransAlta's
Centralia facility largely falls outside of our rating horizon; as a result,
the positive impacts of an improved business risk profile and associated cash
flows have a small impact on our analysis.
-- As we said in our research update from July 23, 2012, the recent
arbitration decision on Sundance Units 1 and 2 increased the probability of a
downgrade because it increases the business risk related to an additional 2.5
gigawatts of capacity sold under similar power purchase agreements and it led
to additional deterioration in the company's financial risk profile.
-- The stable outlook reflects our view that adjusted funds from
operations-to-debt will remain in the 15%-20% range, below the 20% threshold
we associated with the previous ratings.
On Aug. 1, 2012, Standard & Poor's Ratings Services lowered its long-term
corporate credit and senior unsecured debt ratings on Calgary, Alta.-based
power generation company TransAlta Corp. to 'BBB-' from 'BBB'. At the same
time, Standard & Poor's lowered its global scale preferred stock rating on the
company to 'BB' from 'BB+', and its Canada scale rating to 'P-3' from
'P-3(High)'. The outlook is stable.
The downgrade reflects our belief that TransAlta will not improve and maintain
its adjusted funds from operations (AFFO)-to-debt to levels consistent with
the previous ratings or improve its business risk profile in the near term.
The cash flows associated with the long-term contract that TransAlta has
signed at its Centralia facility reduce volume and price risk on the units.
However, the contract falls largely outside our rating horizon, so it has a
negligible immediate credit impact. The contract does not start to generate
cash flows until December 2014 and is contracted for 180 megawatts (MW) of
capacity ramping up in the following two years to reach 380 MW out of a total
capacity of 1,340 MW (28% of the total) in December 2016. The contract is with
Puget Sound Energy Inc (BBB/Stable/A-2), a combined electric and gas utility
business focused in the Puget Sound region of Washington State, which is
subject to regulatory review by the Washington Utilities and Transportation
We expect AFFO-to-debt to remain in the 15%-20% range. While we expect
management to undertake some actions to improve the TransAlta's financial risk
profile in the near term, we do not believe it will be sufficient for the
previous ratings. Our analysis also incorporates low AFFO-to-debt in 2012 as a
result of the Sundance 1 and 2 arbitration decision and net outflows of
C$240million before the units return to service in the fall of 2013.
The ratings on TransAlta reflect Standard & Poor's opinion of the company's
strong business risk profile and significant financial risk profile. In our
view, the business risk profile reflects a predominance of long-term power
purchase arrangements (PPAs) and a relatively diversified electricity
generation portfolio. We believe that offsetting these credit strengths are
high leverage; the potential for year-to-year volatility in cash flow due to
revenue exposure to volume and price risk; asset concentration at Centralia,
TransAlta's largest merchant asset; and the company's involvement in high-risk
energy trading activities. An underlying level of profitability and cash flow
stability comes from long-term power contracts (with a minimum of five years
TransAlta owns and often operates both large and small generation facilities
in North America and Australia. For the 2012-2015 forecast period, more than
two-thirds of its capacity is contracted primarily through legislated Alberta
PPAs or other long-term contracts, with the balance coming from merchant
capacity that the company hedges over a rolling four-year period. At June 30,
2012, TransAlta had about C$5.2 billion in adjusted debt.
Key assumptions underlying the ratings including the following:
-- Ongoing weak power pricing in the Pacific Northwest and downward
pressure on the forward curve in Alberta following the expected return to
service of Sundance 1 and 2 in fall 2013;
-- Ongoing low gas prices that we expect will continue to negatively
affect pricing in both markets;
-- No additional meaningful contracts at Centralia within the rating
-- Our expectation that any securities issued with equity content and
used to pay down debt will be insufficient to materially affect the ratings.
We believe TransAlta has adequate liquidity. Our assessment incorporates the
following expectations and assumptions:
-- We expect the company's liquidity sources over uses to exceed 1.2x
during the next year, and we expect sources to exceed uses even in the event
that EBITDA declines 15%.
-- TransAlta will continue to have solid relationships with its banks and
a generally satisfactory standing in credit markets.
-- Liquidity sources primarily consist of AFFO of about C$800 million for
2012 (excluding the arbitration decision's impact) and undrawn committed
facilities of about C$800 million as of July 23, 2012.
-- Uses of liquidity include expected sustaining capital spending of
about C$400 million, debt maturities of about C$300 million, net penalty
payments of C$150 million, and dividends of more than C$300 million (excluding
the impact of dividend reinvestment programs).
We believe the company will continue to have sufficient headroom under its
The stable outlook reflects our expectation of AFFO-to-debt remaining in the
15%-20% range and a relatively stable business risk profile. We could raise
the ratings if TransAlta improves its business risk profile or if we expect
the company to achieve and maintain AFFO-to-debt of more than 20%. Conversely,
while we don't expect it, a material debt-financed acquisition or capital
building program, costly regulatory or environmental initiatives, or a
sustained deterioration in plant operating performance leading to AFFO-to-debt
falling below 15% could result in a downgrade.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Corporate credit rating BBB-/Stable/-- BBB/Negative/--
Senior unsecured debt BBB- BBB
Global scale BB BB+
Canada scale P-3 P-3(High)