PrefBlog

Standard and Poor’s has announced:

• 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 ‘P-3(High)’.
• 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.

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 to maturity).
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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.

TransAlta currently has two preferred share issues outstanding, TA.PR.D and TA.PR.F, both FixedResets.

DBRS recently put TA on Review-Developing:

DBRS has today placed the BBB Unsecured Debt/Medium-Term Notes and Pfd-3 Preferred Shares ratings of TransAlta Corporation (TAC or the Company) Under Review with Developing Implications. This rating action follows the announcement of the final outcome of the arbitration case regarding the force majeure and economic claim of Sundance 1 and 2 coal-fired generation units. The arbitrator concluded that, although the closure was a result of a force majeure, Sundance 1 and 2 can still be economically restored to service. As a result of this outcome, TAC will be responsible for approximately $190 million in estimated repair costs to restart Sundance 1 and 2, as well as for $150 million in accrued penalties to TransCanada PipeLines Limited (TCPL; rated “A” by DBRS), a wholly owned subsidiary of TransCanada Corporation. However, TAC will still be receiving capacity payments totaling approximately $100 million from the Balancing Pool (established by the Government of Alberta) from today to when the units are restored to service, which is expected to be in the fall of 2013. Therefore, the net cash cost for TAC is estimated to be approximately $240 million.
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DBRS expects TAC to ultimately fund the majority of the aforementioned costs primarily with equity (including preferred shares and dividend re-investment proceeds) in a timely manner to maintain its current leverage level. Any further increase in leverage could cause TAC’s credit risk profile to deteriorate to a level that is no longer commensurate with the current BBB rating.

This entry was posted on Wednesday, August 1st, 2012 at 9:30 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.