DBRS Confirms TransAlta OCP LP at BBB, Stable Trend

DBRS Limited (DBRS) confirmed TransAlta OCP LP’s (the Issuer; a special-purpose vehicle) Issuer Rating and Senior Secured Amortizing Bonds (the Bonds) rating at BBB with Stable trends. The rating confirmations reflect (1) the confirmation of TransAlta Corporation’s (TransAlta) rating at BBB (low) with a Stable trend on April 2, 2019, and (2) the achieved DSCR of 1.06 times (x) in 2018, which is consistent with the expected DSCR of 1.05x. Because of the structural linkage, the 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: $318.1 million) fully amortize on August 5, 2030. The Stable trends reflect (1) TransAlta’s Stable rating trend and (2) the Issuer’s expected stable performance for the next 12 months.

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 underpinned by the 2016 Off-Coal Agreement (the OCA) between TransAlta and the Plant Owners (including K3LP, TGP and TransAlta Cogeneration, L.P.) and the Province of Alberta (Alberta; rated AA with a Negative trend by DBRS). TransAlta met all the required performance obligations in 2017 under the OCA. As a result, the Issuer received a net off-coal payment of $37.3 million on July 31, 2018. The operating cost in 2018 was immaterial, and the actual DSCR of 1.06x was slightly higher than the expected DSCR of 1.05x. Notwithstanding the recent change of Alberta’s provincial government, DBRS believes that the risk remains low for the new government to unilaterally terminate or amend the OCA. TransAlta also indicates that it will continue or even accelerate the timeline to retire or convert its coal-fired plants by 2030, despite potential changes to the carbon policy by the new provincial government.

DBRS expects that 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 OCP Entity (meaning any of the Plant Owners or TransAlta) have resulted in a one-notch rating uplift. A positive or negative rating action on TransAlta will most likely trigger a similar rating action on the Issuer and the Bonds.

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

The principal methodology is Rating Project Finance (October 2018), which can be found on dbrs.com under Methodologies & Criteria.

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@dbrs.com.

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

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

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