DBRS Confirms TransAlta Corporation at BBB and Pfd-3, Stable Trends

DBRS has today confirmed the Issuer Rating and the ratings of the Unsecured Debt/Medium-Term Notes and Preferred Shares of TransAlta Corporation (TAC or the Company) at BBB, BBB and Pfd-3, respectively, all with Stable trends. The confirmation reflects the Company’s high level of contracted output (88% in 2014), strong position in the favourable Alberta (the Province) electricity market (approximately 58% of net capacity) and a reasonable level of geographic and fuel diversification. The Stable trend reflects DBRS’s expectation that TAC will continue to reduce its adjusted debt-to-capital ratio to near or below 50% by the end of 2014 and improve cash flow and interest coverage ratios to be in line with the current rating.

TAC’s business risk profile is considered BBB. The Company’s strong contractual position reduces the volatility of earnings and cash flow. Moreover, TAC’s merchant operations in Alberta benefit from a pricing premium relative to other nearby markets, driven by (1) the Province’s limited interconnections; (2) the Province’s operators being disciplined with their supply strategies; and (3) good electricity demand growth. However, DBRS also recognizes that the relatively weak spark spreads in the Pacific Northwest and the lower power prices in Alberta expected over the short term, due to new capacity that came online in 2013, could be challenging for TAC.

TAC’s key credit metrics are currently in the BB (high) range, which provides the Company with very limited financial flexibility. However, key credit metrics are expected to improve following the 38% decrease in dividend payouts and the reduction of debt with the proceeds from the sale of non-core assets (see the DBRS press release dated February 20, 2014). In addition, the Company is expected to generate a free cash flow surplus in 2014, which is expected to further improve its leverage modestly. The Stable trend reflects DBRS’s expectation that TAC will improve its key credit metrics to the BBB (low) range, including leverage to near or below 50% by the end of 2014. DBRS also expects TAC to continue to fund any significant unforeseen costs, cash shortfalls and/or acquisitions in a prudent manner to prevent any further deterioration of key credit metrics. Any delay in reducing leverage, or further weakness of other key credit metrics, could result in a negative rating action.

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 applicable methodology is Rating Companies in the Non-Regulated Electric Generation Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.