DBRS Limited (DBRS Morningstar) confirmed TransAlta OCP LP’s (the Issuer; a special-purpose vehicle (SPV)) Issuer Rating and Senior Secured Amortizing Bonds (the Bonds) rating at BBB, both with Stable trends. The rating confirmations reflect (1) DBRS Morningstar’s confirmation of TransAlta Corporation’s (TransAlta) rating at BBB (low) with a Stable trend on April 3, 2020, and (2) the Issuer's satisfactory debt service coverage ratio (DSCR) of 1.08 times (x) achieved in 2019, which is higher than the expected 1.05x. Because of the structural linkage, the Issuer’s ratings are expected to move in lockstep with TransAlta’s. The one-notch rating uplift is expected to persist until the $344.7 million Bonds (outstanding balance: $297.6 million) fully amortize on August 5, 2030. The Stable trends reflect (1) TransAlta’s Stable rating trend and (2) the Issuer’s expected stable DSCR for the next 12 months. DBRS Morningstar also believes that the current Coronavirus Disease (COVID-19) pandemic will have a limited impact on the Issuer.
TransAlta is one of Canada’s largest independent power producers with approximately $9.5 billion in assets. It indirectly and wholly owns the Issuer, primarily through two subsidiaries: Keephills 3 Limited Partnership (K3LP) and TransAlta Generation Partnership (TGP). The ratings are predicated on the revenue annuity received from the Province of Alberta (Alberta or the Province; rated AA(low) with a Negative trend by DBRS Morningstar) under the 2016 Off-Coal Agreement (the OCA) by the Plant Owners (including K3LP, TGP, and TransAlta Cogeneration, L.P.). TransAlta met all the required performance obligations in 2018 under the OCA. As a result, the Issuer received a net off-coal payment of $37.3 million on July 31, 2019. The achieved DSCR of 1.08x in 2019 was higher than the expected 1.05x, largely driven by the lower-than-expected operating expense. Notwithstanding the change of Alberta’s provincial government in 2019, DBRS Morningstar continues to believe that the risk remains low for the current government to unilaterally terminate or adversely amend the OCA. TransAlta also indicates that it will accelerate its coal-to-gas conversion program by 2025 at the latest.
In September 2019, TransAlta and Capital Power Corporation swapped their respective 50/50 non-operating interests in Keephills Generating Station Unit No. 3 and Genesee Generating Station Unit No. 3, according to an agreement reached earlier. As a result, the OCA was amended and consented to by the Alberta government. Nonetheless, the transaction did not trigger any change to the annual net off-coal payment of $37.3 million to TransAlta OCP LP, nor the governance and financing documents. Subsequently, DBRS Morningstar determined that the transaction would have no impact on the ratings. (Please see the DBRS Morningstar commentary “DBRS Comments on the Impact of the Proposed Off-Coal Agreement Amendment on TransAlta OCP LP,” dated September 11, 2019, for details)
DBRS Morningstar expects the ratings to move in lockstep with TransAlta’s because of the structural linkage between the two entities. Nonetheless, certain structural enhancements made to mitigate the insolvency risk of any TransAlta OCP Entity have resulted in a one-notch rating uplift. TransAlta continues to have stable credit profile amid the current coronavirus pandemic. Therefore, DBRS Morningstar expects the Issuer's rating to remain Stable for the next 12 months. Nonetheless, a positive or negative rating action taken by DBRS Morningstar on TransAlta will most likely trigger a similar action on the Issuer's rating.
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.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Project Finance (August 21, 2019) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020, 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.
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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.
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