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

DBRS Limited (DBRS Morningstar) 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 Morningstar’s rating actions follow a review of TAC’s 2019 financial results, as well as its business strategy and refinancing plan for corporate debt. The Stable trends reflect DBRS Morningstar’s view that (1) the exposure to merchant risk in Alberta for 2020 is well hedged, (2) the Coronavirus Disease (COVID-19) pandemic would not have material impact in the near term, and (3) TAC’s business risk and 2020 credit metrics (modified consolidated) are expected to remain solid and supportive of the current ratings.

TAC’s business risk profile remained stable in 2019. However, the main challenge still remains in Alberta, as all Alberta power purchase agreements (PPAs), accounting for approximately 20% of 2019 EBITDA, expire in 2020. DBRS Morningstar has factored the expiry of the Alberta PPAs into the current ratings. In July 2019, Alberta’s government announced the cancellation of the capacity payment market proposed by the previous government and will instead maintain the existing energy-only market. Although, cancellation of the capacity market will result in higher volatility in power prices but would benefit existing market participants such as TAC because the now-cancelled capacity market structure would have reduced barriers to entry and encouraged more competition for the market incumbents. In addition, TAC is on track with its plan to convert coal-based generating assets to natural gas-based assets, and the conversion costs are significantly lower than greenfield projects. As coal power-generating assets will be completely retired by 2030, more investments are required in Alberta. DBRS Morningstar expects that TAC's gas-based assets can provide support to system stability, and its hydro assets have significant advantages over other alternatives.

DBRS Morningstar notes that the Investment Agreement between Brookfield Renewable Partners L.P. (rated BBB (high) with a Stable trend by DBRS Morningstar) along with its institutional partners (collectively, Brookfield) and TAC is supportive of TAC's effort of reducing corporate debt and provided sufficient liquidity to accelerate the coal-to-gas conversion program. The timing of the issuance of $350 million Subordinated Notes to Brookfield slightly weakened 2019 credit metrics compared with 2018 metrics but these 2019 metrics remained consistent with 2017 levels. TAC expects to use Brookfield's second investment of $400 million to repay most of its long-term debt due in 2020. As a result, refinancing risk for 2020 remains modest. TAC would achieve its goal of substantially reducing corporate debt to $1.2 billion by the end of 2020 from $3.2 billion in 2016 and would further improve its ability to cope with the volatile market.

The rating confirmations factor in the following expectations of DBRS Morningstar: (1) the post-2020 Alberta energy-only market will not materially weaken the Company’s current business risk profile and (2) TAC will execute on its commitment to reduce TAC's unsecured corporate debt to approximately $1.2 billion by the end of 2020 and will maintain its 2020 modified consolidated metrics around the 2019 level. DBRS Morningstar expects further that the impact of coronavirus will be temporary. If there is a material and prolonged impact of the coronavirus on TAC's business and financial profile, DBRS Morningstar may consider a negative rating action.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Independent Power Producer Industry, DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Their Parent/Subsidiary Rating Relationships, which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577