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

DBRS has today 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 (1) the relatively stable earnings contribution from OPG’s regulated electricity generation businesses, which accounted for approximately 80% of total generation output produced in 2011, (2) a reasonable regulatory environment and (3) a good financial profile.

OPG’s credit metrics have remained relatively stable over the past year. The Company generated a moderate cash flow deficit of approximately $128 million in 2011. This deficit was largely driven by higher capital requirements (capex) to fund new hydroelectric and refurbishment projects, which include the Lower Mattagami River (rated A (high)) and the Niagara Tunnel projects. The cash shortfall was primarily funded by increased debt, which had only a small negative impact on key credit ratios.

Coal plant shutdowns, which are expected to remove approximately one-third of OPG’s total generation capacity by 2014, are changing the Company’s generation mix going forward. In 2011, OPG closed two additional units at the Nanticoke coal-fired station, which reduced unregulated thermal capacity by 880 megawatts (MW). As the Company adds new generation capacity to replace the coal plant capacity and support electricity consumption growth, capex could rise significantly, creating pressure for the balance sheet. DBRS expects the Company to continue including capex in its future rate base as construction of these projects comes to completion. Rates for regulated hydroelectric facilities decreased to $34.13/megawatt hour (MWh) (including a negative $1.65/MWh rate rider), whereas rates for regulated nuclear facilities increased to $55.85/MWh (including a positive $4.33 rate rider). DBRS also expects the Province of Ontario (the Province; rated AA (low) with a Stable trend) to be directly involved in the planning and development processes of any major project initiatives, such as the Darlington Nuclear Generating Station Refurbishment Project, and provide financial support, if necessary, to maintain adequate financial flexibility for the assigned rating category. Any significant increase in leverage and project risk could cause OPG’s credit risk profile to deteriorate to a level that is no longer commensurate with the current A (low) rating.

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

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