DBRS Morningstar Confirms TransAlta OCP LP’s Ratings at BBB with Stable Trends

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 or the Company) Issuer Rating at BBB (low) with a Stable trend on April 5, 2021, and (2) the Issuer's satisfactory debt service coverage ratio (DSCR) of 1.07 times (x) achieved in 2020, 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 (with an outstanding balance of $276 million) fully amortize on August 5, 2030. The Issuer’s Stable trends reflect (1) TransAlta’s Stable trends and (2) the Issuer’s expected stable DSCR for the next 12 months. The ongoing Coronavirus Disease (COVID-19) pandemic has had no direct impact on the Issuer.

TransAlta is one of Canada’s largest independent power producers with approximately $9.4 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 (rated AA (low) with a Negative trend by DBRS Morningstar) under the 2016 Off-Coal Agreement (the OCA) by K3LP; TGP; and TransAlta Cogeneration, L.P. (the Plant Owners). TransAlta met all the required performance obligations in 2019 under the OCA. As a result, the Issuer received a net off-coal payment of $37.3 million on July 31, 2020. The achieved DSCR of 1.07x in 2020 was higher than the expected 1.05x, largely driven by the lower-than-expected total cost. Notwithstanding the change of Alberta’s 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 indicated that it will further accelerate and complete its coal-to-gas conversion by the end of 2021.

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 TransAlta or any of the Plant Owners have resulted in a one-notch rating uplift. TransAlta continues to have a stable credit profile amid the ongoing coronavirus pandemic. 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 rating.

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/373262.

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

The principal methodologies are Rating Project Finance (September 1, 2020; https://www.dbrsmorningstar.com/research/366229) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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