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

DBRS Limited (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 reflects the recent Ontario Energy Board (OEB) decision which is expected to improve the stability of earnings as the Company has seen below-average returns recently. OPG’s ratings also assume that the Company will continue to receive financial support provided by the owner, the Province of Ontario (the Province; rated AA (low) by DBRS) which, through its agent the Ontario Electricity Finance Corporation (OEFC; rated AA (low) by DBRS), provides most of OPG’s financing (approximately 69% of total debt).

In November 2014, OEB issued its decision on OPG’s 2014-2015 rate application. The OEB approved, effective November 1, 2014, (1) higher rates for the Company’s previously regulated hydroelectric and nuclear facilities and (2) rates for 48 previously non-regulated and non-contracted hydroelectric plants. The rates for these newly regulated facilities will allow OPG to fully recover all operating and capital costs as well as to generate a reasonable level of profitability for these plants going forward, improving the stability of its earnings. Additionally, along with the Company’s ongoing initiative of reducing headcount to lower its cost base, the new rates are also expected to help improve OPG’s financial performance, which had been challenged by below-average profitability in its non-regulated sector and continued high capital expenditures. As OPG continues to undertake large capital intensive projects, such as the refurbishment of the Darlington Nuclear Generating Station, the Company is expected to generate further free cash flow deficits. DBRS expects the deficits to persist and to continue to be funded through incremental debt, which will likely lead to deteriorations in the Company’s credit metrics; however, as long as the additional debt is provided by the OEFC or is in the form of non-recourse project finance debt (approximately 31% of total debt), this will not likely have a material impact on OPG’s overall credit profile. As such, the continuation of the Province’s support will be critical in maintaining OPG’s credit profile.

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 cash flow and 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.

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

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2014) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.