DBRS Confirms Ontario Power Generation Inc. at A (low), Stable

DBRS has today confirmed the Issuer Rating and the Unsecured Debt and Commercial Paper ratings of Ontario Power Generation Inc. (OPG or the Company) at A (low), A (low) and R-1 (low), respectively, all with Stable trends. The confirmations reflect (1) the relatively stable earnings contribution from OPG’s regulated generation businesses, (2) a reasonable regulatory environment and (3) good financial flexibility.

OPG continues to benefit from its regulated operations, which accounted for approximately 81% of total generation output and approximately 65% of EBITDA in 2012. The regulated operations provide the Company with relatively stable earnings contribution. However, the non-regulated operations remain exposed to the merchant power market environment in Ontario, which is a challenge due to its volatile effects on the Company’s financial profile. In 2012, OPG’s non-regulated segment was negatively affected by a lower electricity wholesale price in Ontario and a decrease in generation output. If a depressed electricity wholesale environment continues, it will have a negative impact on OPG’s non-regulated power earnings. Over the medium term, volatility in earnings and cash flow could be offset by more capacity coming from regulated and contracted assets, with two major expansion projects (Niagara Tunnel and Lower Mattagami River) coming on line between 2013 and 2015.

OPG is expected to generate free cash flow deficits over the medium term, driven by higher capital expenditure requirements to fund hydroelectric and refurbishment projects. This will likely lead to a rise in leverage, to around 45%, over the next few years, which is still in line with the current rating category. DBRS notes that 77% of its long-term debt is held by the Ontario Electricity Finance Corporation (OEFC; rated AA (low)), an agency of the Province of Ontario (rated AA (low)). The remaining 23% is non-recourse project finance debt issued by Lower Mattagami Energy Limited Partnership (rated A (high)) and UMH Energy Partnership. DBRS views the debt owed to the OEFC as related party debt since funding is provided by the Province, who is also the owner of OPG.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry (May 2011), which can be found on our website under Methodologies.