DBRS Updates Its Report On Ontario Power Generation Inc.

DBRS has today updated its report on Ontario Power Generation Inc. (OPG or the Company). The credit quality of OPG is based on (1) the relatively stable earnings contribution from OPG’s regulated electricity generation businesses, which accounted for approximately 79% of total generation output produced in the first quarter of 2012 (Q1 2012), (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 $170 million in Q1 2012. This deficit was largely driven by higher capital expenditure (capex) requirements to fund new hydroelectric and refurbishment projects, which include the Lower Mattagami River (rated A (high) with a Stable trend) and the Niagara Tunnel projects. The cash flow deficit was primarily funded by increased debt and cash on hand, which had only a slight negative impact on key credit ratios.

As the Company adds new generation capacity to support growth and replace coal-fired capacity, capex is expected to rise significantly, creating pressure on the balance sheet. The Company has consistently maintained a low level of leverage, with the majority of its long-term debt held by the Ontario Electricity Finance Corporation (OEFC), providing good financial stability. However, 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. Furthermore, DBRS is increasingly concerned about the continued challenging merchant power market environment that could materially add to the Company’s existing challenges in the medium term. The ongoing depressed natural gas price has resulted in weaker wholesale power prices, which in turn, negatively affected OPG’s non-regulated power earnings.

DBRS 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 (e.g., Darlington Nuclear Generating Station Refurbishment Project) and, if necessary, provide financial support to maintain adequate financial flexibility.

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.