PrefBlog

Standard & Poor’s has announced:

• •TransAlta Corp.’s (TAC) reduction of contractedness via the expiry of Alberta power purchase agreements in 2018 and 2020 increases the company’s business risk.
• •TAC’s financial metrics, although improving, may not sufficiently offset the potential increase in business risk.
• •As a result, we are revising our outlook on the company to negative from stable.

…
“The outlook revision reflects our view that although TAC’s financial metrics have improved, they might not sufficiently offset the potential increase in business risk as a result of the reduction of contractedness via the expiry of the Alberta power purchase agreements in 2018 and 2020,” said S&P Global Ratings credit analyst Stephen Goltz.

Underpinning TAC’s strong business risk profile is the strength of the company’s contractual framework, in particular Alberta coal PPAs, which currently cover approximately 50% of TAC’s total capacity. The PPAs’ structure has mitigated Alberta’s volatile electricity prices, particularly in the past two years.
…
The company has made strong inroads into deleveraging its balance sheet amid Alberta’s very difficult power market. For the outlook period we forecast adjusted funds from operations (AFFO)-to-debt to improve to around 20%. However, while financial metrics have improved and are forecast to continue to do so, we see some headwinds that might impede the company’s ability to further raise them to a level that would mitigate the PPAs’ loss. We believe that the difficult operating environment will persist through the outlook period, with power prices likely to remain at their current depressed levels.
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The negative outlook reflects our expectation that TAC’s business risk may increase as the company’s Alberta PPAs mature without TAC having an offsetting replacement mechanism that provides equivalent support to business risk or without continued improvement to financial metrics. We forecast that FFO-to-debt will be in the 18%-20% range and that contractedness will fall to about 73% in 2018 and to approximately 35% at the end of 2020 absent replacement contracts.

We could take a negative rating action if we believe that the factors that support a positive comparable rating assessment modifier will not continue. This could result from a reduction of contractedness without the replacement equivalent mechanisms and adjusted FFO-to-debt remaining at about 20%.

Affected issues are TA.PR.D, TA.PR.E, TA.PR.F, TA.PR.H and TA.PR.J.

This announcement follows last’s week’s downgrade to Pfd-3(low) by DBRS.

This entry was posted on Tuesday, April 11th, 2017 at 9:14 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.