Press Release

DBRS Confirms TransAlta Corporation at BBB (low) and Pfd-3 (low) with Stable Trends

Utilities & Independent Power
April 02, 2019

DBRS Limited (DBRS) confirmed the Issuer Rating and Unsecured Debt/Medium-Term Notes rating of TransAlta Corporation (TAC or the Company) at BBB (low) and TAC’s Preferred Shares rating at Pfd-3 (low). The trends are Stable. DBRS’s rating actions follow a review of TAC’s 2018 financial results, as well as its business strategy and refinancing plan for corporate debt over the medium term. DBRS believes that TAC’s current business risk and financial metrics (consolidated and modified consolidated) remain supportive of the current ratings.

TAC’s business risk profile remained stable in 2018, but the challenges in Alberta’s power market remained. As expected, the early terminations of the Sundance B and Sundance C Alberta power purchase agreements in March 2018 had a negative impact on cash flows for the year and until 2020. But the impact was significantly mitigated by the one-time payment of $157 million. Stronger wholesale power prices in 2018 (compared with 2017) in Alberta in the Pacific Northwest markets helped to improve cash flow from merchant generation assets, but these markets remain volatile and unpredictable going forward. The diversification strategy is on track with additional wind power projects either coming on line or under construction in the United States and Australia. The ownership of TransAlta Renewables (RNW) decreased to 61% at the end of 2018 from 64% in 2017. This decrease in the ownership is a result of RNW issuing equity for its financing and does not have any impact on the cash flow up to TAC from RNW.

In March 2019, TAC entered into an agreement with Brookfield Renewable Partners L.P. and its institutional partners (collectively, Brookfield). Under the agreement, Brookfield will invest $750 million into TAC through purchases of exchangeable securities in the form of $350 million junior subordinated notes (expected in April 2019) and $400 million preferred shares (expected in October 2020). TAC’s 2018 financial results improved from solid 2017 levels. Based on DBRS’s pro forma on Brookfield’s investment, TAC’s pro forma 2018 credit metrics would weaken slightly compared with its actual 2018 metrics but would remain consistent with 2017 levels. DBRS believes that the proposed investment does not have a material impact on TAC’s current credit profile. Please see DBRS’s press release dated March 25, 2019, for details on this transaction.

The rating confirmations factor in the following expectations of DBRS: (1) The post-2020 Alberta capacity market auction will not materially weaken the Company’s current business risk profile. (2) TAC’s hydro and wind assets are expected to benefit from capacity payments and green credits post-2020. (3) TAC’s coal-to-gas conversion plan will be completed on time and within its estimated costs of approximately $300 million. Significant cost overruns and/or lengthy delays would have a negative impact on cash flow and earnings and 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 under Related Documents or by contacting us at info@dbrs.com.

The principal methodologies are Rating Companies in the Independent Power Producer Industry (May 2018), DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (November 2018), which can be found on www.dbrs.com under Methodologies & Criteria.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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