(The following statement was released by the rating agency)
NEW YORK, January 15 (Fitch) Fitch Ratings views TransAlta Corporation's
(TransAlta) dividend reduction as a positive signal of management's commitment
to deleveraging as the company faces unfavorable equity market conditions and
energy price environment. The cash flow savings, about C$150 million annually,
will alleviate medium-term concerns as TransAlta seeks to recalibrate its
capital structure ahead of the expiry of power purchase agreements (PPAs) for
its Alberta-based coal-fired generation assets.
A key driver of TransAlta's 'BBB-' Issuer Default Rating (IDR) is its
debt-reduction commitment ahead of full transition of the Alberta energy market
to competitive generation. Fitch estimates that adjusted-debt to EBITDAR of
3.25x is commensurate with a 'BBB-' IDR for merchant generators with a portfolio
of at least 50% long-term contracted assets. Fitch uses proportional
consolidation of 64%-owned TransAlta Renewables Inc. (TRI, not rated) debt and
EBITDA to reflect increased subordination of TransAlta's cash flows to that of
TRI's debt holders and equity investors. TRI is expected to grow to about 35% of
TransAlta's consolidated EBITDA by the end of 2017.
Contrary to Fitch's expectations, TransAlta's consolidated adjusted debt rose by
C$400 million during the first nine months of 2015 to reach C$4.9 billion at
Sept. 30, 2015. The increase was mainly driven by a stronger US dollar, as
TransAlta translates its fully hedged US-dollar denominated debt into its
Canadian-dollar functional currency. Fitch estimates TransAlta's proportionate
consolidated adjusted debt to EBITDAR at about 4.5x, pro-forma the cash proceeds
from equity issuance and incremental asset dropdowns announced by TRI in
November 2015, which is about 1x above the targeted level for year-end 2018. The
combination of positive discretionary free cash flows and sharply reduced
dividend payments should enable TransAlta to achieve modest incremental debt
reduction in 2016-2018, without having to tap the equity markets. The ample
liquidity and lack of debt maturities until June 2017 further supports the
ratings.
Expected growth in non-recourse project-level debt will result in Fitch
transitioning to a deconsolidated approach when assessing TRI. This approach
recognizes that operating assets are encumbered by project-level debt that is
structurally superior to parent-level debt. The residual cash flow available for
upstream dividends and distributions is more volatile than the direct cash flow
from wholly-owned unencumbered assets, and may be subject to payment
restrictions under debt covenants or corporate bylaws.
EBITDA generation has proven resilient to depressed wholesale energy prices in
2014-2015 and is expected to remain close to C$1 billion annually in 2016-2017,
helped by highly contracted cash flows and cost cutting initiatives.
Nonetheless, Fitch views long-term downside risk to EBITDA generation as PPA and
financial hedges roll-off. Hedge prices of approximately $50 per MWh in Alberta
for 2016 exceed Fitch's long-term view for wholesale electricity prices in
Alberta. Recently announced environmental policy in Alberta adds downward risk
to our longer-term EBITDA forecast. Any lowering of Fitch sustainable EBITDA
assumption post-2020 would have to be met with incremental debt reduction to
maintain the current ratings and Outlook.
Contact:
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
Fitch Ratings Ltd
33 Whitehall Street
New York, NY 1004
Maude Tremblay, CFA
Director
+1-312-368-3203
Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email:
alyssa.castelli@fitchratings.com.
Additional information is available on www.fitchratings.com
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