DBRS Comments on TransAlta’s Notice of Termination for Sundance 1 and 2 Power Purchase Arrangement

DBRS notes that TransAlta Corporation (the Company or TAC) has issued a notice of termination for destruction on its Sundance 1 and 2 coal-fired generation units under the terms of the Sundance A Power Purchase Arrangement (PPA).

Sundance 1 and 2 comprised 560 MW (5% of TAC’s gross operating capacity) of the 2,126 MW Sundance power plant, which has six individual units and serves as a baseload facility for the Alberta electricity system. The Company had taken the two units out of service in mid-December 2010 due to testing that indicated boiler tube conditions were no longer at their design limit. TAC has concluded that after extensive physical inspection of the boilers in the units and review of the terms and conditions of the PPA, the units cannot be economically restored to service. The PPA holder is TransCanada Corp., which has ten business days from the date of TAC’s notice to either agree with or dispute TAC’s conclusion on the units.

DBRS does not expect the possible closure of Sundance 1 and 2 and the termination of the PPAs to have a material impact on TAC’s financial profile or have any impact on its ratings (BBB and Pfd-3, both with Stable trends). The Company expects to recover the net book value which DBRS estimates at approximately $175 million based on the capital depreciation set out in the PPA. The annual cash flow reduction is not expected to be material to TAC. However, this highlights one of the challenges that TAC faces with a higher risk of unplanned outages at its Alberta thermal plants, due to the age of the plants and the potential severity of the outages.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas, and Pipelines), which can be found on our website under Methodologies.