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

DBRS has today confirmed the Issuer Rating and Unsecured Debt rating of Ontario Power Generation Inc. (OPG or the Company) at A (low) and the Commercial Paper rating at R-1 (low), all with Stable trends. The confirmation is largely based on the financial support provided by the owner, the Province of Ontario (the Province; rated AA (low)), through its agent the Ontario Electricity Finance Corporation (OEFC; rated AA (low)). DBRS views the debt owed to the OEFC (approximately 70% of total debt) as quasi-equity as both OPG and the OEFC are wholly owned by the Province. The confirmation is also based on OPG’s dominant market position in Ontario and the reasonable regulatory framework in the Province.

The continuation of the Province’s support is critical as the Company’s financial performance has been challenged by below-average profitability in its non-regulated sector and continued high capital expenditure (capex). OPG’s return on equity has been poor, ranging from -3% to 3% over the past five years, significantly below the level its regulated peers are typically allowed to earn in Ontario (8% to 10%). The Company is expected to continue to generate free cash flow deficits as it undertakes capital-intensive projects, such as the refurbishment at the Darlington Nuclear Generating Station. DBRS expects the deficits to persist and to continue to be funded through incremental debt, which will likely lead to further deterioration in its credit metrics. However, this will not likely affect the Company’s overall credit profile as long as the additional debt is provided by the OEFC, or is in the form of non-recourse project finance debt (approximately 30% of total debt). The Company and the Province have also developed a number of strategies to improve financial performance, including: (1) prescribing all of OPG’s currently non-regulated and non-contracted stations to be regulated in order to fully cover all operating and capital costs, as well as to generate reasonable profitability; (2) reducing headcount to lower cost base; and (3) increasing regulated rates. Should the Company successfully execute these initiatives, operating cash flow could improve and return on equity could become more comparable to that of its peers.

OPG’s business risk profile is reflective of the A (low) range, largely reflecting its dominant market position in Ontario. The Company’s financial risk profile is in the BBB range, with strong debt metrics undermined by a weak coverage ratio. However, the overall credit profile is reinforced by the financial support DBRS expects the Province to continue to provide over the medium term.

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 Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.