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

DBRS Limited (Morningstar DBRS) confirmed TransAlta OCP LP's (the Issuer) Issuer Rating and Senior Secured Amortizing Bonds (the Bonds) rating at BBB, both with Stable trends. The $344.7 million Bonds (current outstanding balance: approximately $205.9 million) will fully amortize on August 5, 2030. The rating confirmations follow Morningstar DBRS' confirmation of TransAlta Corporation's (TransAlta or the Company) Issuer Rating at BBB (low) with a Stable trend on December 4, 2023, along with the Issuer's satisfactory debt service coverage ratio (DSCR) of 1.09 times (x) achieved in 2023, which was higher than the expected 1.05x. The Stable trends mirror TransAlta's Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The Issuer is a non-bankruptcy-remote special-purpose vehicle, wholly and indirectly owned by TransAlta, primarily through two subsidiaries: Keephills 3 Limited Partnership (K3LP) and TransAlta Generation Partnership (TGP). TransAlta is one of Canada's largest independent power producers with approximately $10.7 billion in assets. The debt service depends on the revenue annuity received from the Province of Alberta (Alberta or the Province; rated AA with a Stable trend by Morningstar DBRS) under the OCA by K3LP, TGP, and TransAlta Cogeneration, L.P. (TCLP) (together, the Plant Owners). The TransAlta OCP Entity is any of the Plant Owners or TransAlta.

Morningstar DBRS applies the Guarantees and Other Forms of Support segment of “Morningstar DBRS Global Corporate Criteria” to assess the ratings. The Issuer Rating starts with TransAlta's BBB (low) rating level because of the (1) contractual transfer to the Issuer of cash flow received by TransAlta OCP Entities under the 2016 Off-Coal Agreement (the OCA) from the Province and (2) structural linkage between the Issuer and the TransAlta OCP Entities. A one-notch rating uplift from TransAlta's rating level is then provided to the Issuer because certain structural enhancement features have mitigated, to a degree, the negative impact on the Issuer from potential insolvency of any TransAlta OCP Entity.

In 2022, TransAlta met all the required performance obligations under the OCA. As a result, TransAlta OCP Entities, in July 2023, received full net off-coal payment of $37.3 million from the Province, which was then transferred to the Issuer for debt service. The achieved DSCR of 1.09x in 2023 was higher than the expected 1.05x, largely because the interest income on the intercompany loan outpaced interest expense on the Bonds. As of year-end 2021, TransAlta no longer owned any coal-fired generation plant in Alberta as a result of accelerating its coal-to-gas conversion program. Morningstar DBRS continues to believe that the risk remains remote for the Province to unilaterally terminate or adversely amend the OCA.

CREDIT RATING DRIVERS
The credit ratings will move in lockstep with TransAlta’s. Any positive or negative credit rating action on TransAlta will trigger a similar credit rating action on the Issuer.

FINANCIAL OUTLOOK
Morningstar DBRS continues to project a minimum DSCR of 1.05x for the remaining term of the Bonds. Nonetheless, the financial metrics are less important in Morningstar DBRS’ analysis because the ratings are essentially a flow-through of TransAlta's rating plus a one-notch uplift because of the structural enhancement features in the transaction.

CREDIT RATING RATIONALE
The BBB ratings are underpinned by (1) the high-quality and highly stable cash flow generated under the OCA; (2) nononerous performance obligations under the OCA; (3) TransAlta's solid credit profile as the starting point of the ratings; and (4) structural enhancement features that intend to mitigate insolvency risk associated with any of the TransAlta OCP Entities. The challenges include (1) a lack of bankruptcy remoteness from TransAlta OCP Entities; and (2) no direct right, title, or interest in the OCA nor in the Plant Owners' respective share of the off-coal payments.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

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

Morningstar DBRS applied the following principal methodology:

Morningstar DBRS Global Corporate Criteria (15 April 2024)
https://dbrs.morningstar.com/research/431186/morningstar-dbrs-global-corporate-criteria

The following criteria has also been applied:
Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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