DBRS Limited (DBRS Morningstar) confirmed TransAlta OCP LP’s (the Issuer; a special-purpose vehicle) 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) Issuer Rating at BBB (low) with a Stable trend on March 31, 2023; and (2) the Issuer's satisfactory debt service coverage ratio (DSCR) of 1.07 times (x) achieved in 2022, which was 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 based on structural enhancement is expected to persist until the $344.7 million Bonds (current outstanding balance: $230.4 million) fully amortize on August 5, 2030. The Stable trends mirror TransAlta’s Stable trend.
TransAlta is one of Canada’s largest independent power producers with approximately $10.7 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 Positive trend by DBRS Morningstar) under the 2016 Off-Coal Agreement (the OCA) by K3LP; TGP; and TransAlta Cogeneration, L.P. (TCLP; collectively, the Plant Owners). TransAlta met all the required performance obligations in 2020 under the OCA. As a result, the Issuer received a net off-coal payment of $37.3 million on July 31, 2022. The achieved DSCR of 1.07x in 2022 was higher than the expected 1.05x, largely driven by the lower-than-expected total cost. As of YE2021, TransAlta no longer owned any coal-fired generation plants in Alberta as a result of accelerating its coal-to-gas conversion program. DBRS Morningstar continues to believe that the risk remains low for the Province to unilaterally terminate or adversely amend the OCA.
DBRS Morningstar expects the ratings to move in lockstep with TransAlta’s ratings because of the structural linkage between the two entities. Nonetheless, certain structural enhancements made to mitigate the insolvency risk of TransAlta or any of the Plant Owners have resulted in a one-notch rating uplift. TransAlta continues to have a stable credit profile. Therefore, DBRS Morningstar expects the Issuer's ratings to remain stable for the next 12 months. Should DBRS Morningstar take a positive or negative rating action on TransAlta, such action will most likely trigger a similar one on the Issuer's ratings.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodology:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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 firstname.lastname@example.org.
The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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@example.com.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at firstname.lastname@example.org.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577