DBRS Confirms Ontario Power Generation at A (low) and R-1 (low)

DBRS has confirmed the Unsecured Debt and Commercial Paper ratings of Ontario Power Generation Inc. (OPG or the Company) at A (low) and R-1 (low), respectively, with Stable trends. The rating confirmations reflect OPG’s relatively modest level of business risk, stemming from its regulated and non-regulated electricity generation operations; its solid financial profile, underpinned by its stable balance sheet and credit metrics; and an improved regulatory environment. DBRS notes that the OPG ratings continue to be supported by a sole shareholder, the Province of Ontario (the Province), which is rated AA (low) with a Stable trend. The confirmation is further supported by OPG’s limited credit risk exposure, since its principal counterparty is the Independent Electricity System Operator (IESO), a creation of the Province that is governed by provincial regulation and legislation.

In June 2010, OPG initiated the construction of the $2.6-billion Lower Mattagami Project, rated A (high), R-1 (low) (see rating report for further detail). OPG formed Lower Mattagami Energy Limited Partnership (LMELP) and Lower Mattagami Limited Partnership (LMLP); collectively, the Lower Mattagami River Project, to redevelop existing OPG hydroelectric generating assets on the Lower Mattagami River in northern Ontario. LMELP will hold 448 megawatts (MW) of generating assets, while LMLP will hold the yet-to-be-constructed 491 MW of generating assets. LMELP is sourcing third-party debt to partially fund the redevelopment.

On October 1, 2010, OPG took four coal-fired electricity generating units permanently off-line as scheduled. Units 1 and 2 at Lambton Generating Station and Units 3 and 4 at Nanticoke Generating Station were placed in safe, permanent shutdown. OPG initially announced the shutdown of the generators in September 2009.

In May, OPG filed an application with the Ontario Energy Board (OEB) for new rates. If the application is approved, the new rates would take effect on March 1, 2011, and remain in place for 22 months until the end of 2012.

While provincial ownership and financial support limited downward movement in OPG’s ratings during earlier periods of weak financial performance by the Company, the current ratings take into account OPG’s financial profile on a stand-alone basis. The financial profile of OPG has generally improved over the years, although recent results and credit metrics for the 12 months ending (LTM) September 30, 2010, of 14.4% cash flow-to-total debt and 5.88 times EBITDA gross interest coverage were lower but remain within the range that one would expect for the ratings.

In 2008, the Province selected the Darlington Nuclear Generating Station (Darlington) for a new stand-alone two-unit nuclear plant, with OPG as the operator. The Province suspended a competitive request for proposal (RFP) to procure two new nuclear reactors planned for the Darlington site, citing concerns about the cost of the project and the uncertainty surrounding the future of Atomic Energy of Canada Limited (AECL), one of the three companies bidding for the expansion project. The Province recently stated in its Long-Term Energy Plan that nuclear power should be approximately 50% of the Province’s electricity supply. It stated that in order to achieve this target, the Province will need two new nuclear units at Darlington, invest in the refurbishment of the existing Darlington station and extend the life of the Pickering B station until 2020. If these projects proceed, it is expected that the Province, via the Ontario Electricity Financial Corporation (OEFC), will provide OPG with all of the funds required to build the expansion.

Over the long term, a number of potential capital projects, including new and refurbished nuclear, coal station re-powering (i.e., natural gas or biomass) and new hydroelectric facilities could pose several significant financing challenges and materially affect OPG’s credit metrics during the build-out period; the Province would be expected to be directly involved in the planning and development processes of any major nuclear initiative and provide financial support if necessary. The ratings impact (if any) of a significant new nuclear build would be determined upon review of finalized construction and funding plans. DBRS expects the Province would provide significant support for any large nuclear undertaking by OPG.

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

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas, and Pipelines), which can be found on our website under Methodologies.