DBRS Assigns BBB Rating to Bruce Power L.P., Stable Trends

DBRS Limited (DBRS) has today assigned an Issuer Rating of BBB with a Stable trend to Bruce Power L.P. (BPLP or the Partnership). DBRS has also assigned a provisional rating of BBB with a Stable trend to BPLP’s proposed Senior Unsecured Notes (the Notes). The assigned ratings reflect (1) BPLP’s consistent operating track record, (2) high level of operating cost recovery certainty under the amended and the restated Bruce Power Refurbishment and Implementation Agreement (the Implementation Agreement) with the Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS) and (3) robust financial risk profile.

The Implementation Agreement provides price certainty on all electricity sold into the spot market and allows BPLP to recover all reasonable costs related to the procurement of nuclear fuel and used fuel cost. In addition, the Partnership is compensated for volumes associated with deemed generation. As a result, the Partnership’s operating performance is largely influenced by its capability factor (capacity factor including deemed generation). The ratings assume that BPLP’s capability factor will remain in line with its historical utilization rate with no prolonged unplanned outages. Since 2003, the Partnership has maintained a capability factor of 80% to 90%, providing strong operating cash flow. DBRS expects BPLP’s capability factor to be around 82% to 83% in 2016, considering the Partnership’s planned outages and target forced loss rate of 3% to 4%.

Maintaining an above-average financial risk profile is critical to preserve the BBB rating in the midst of large and complex life-extension programs where BPLP fully assumes the risk of cost overruns. The Partnership has started to invest in life-extension activities for Units 3 to 8, and capital investment (capex) is expected to continue to rise and peak at around $1.6 billion in 2027 (complete in 2033). DBRS believes BPLP is in a good position to execute this life-extension project with its high degree of complexity and cost overrun risk, partly because of the Partnership’s low leverage. BPLP’s owners have capitalized the Partnership with high equity levels through cash calls and limited debt utilization. As a result, the debt-to-capital ratio was very low at 12.1% as at March 31, 2016. While BPLP’s leverage is expected to rise with continued high distribution payouts and rising capex, the key financial metrics are expected to remain solid for the current rating category, providing adequate financial flexibility for potential cost overruns and delays. DBRS acknowledges that there are a number of meaningful risk-sharing and contractual protections in place, such as a provision that allows BPLP to reset major component replacement (MCR) capex associated with the nuclear life-extension project 15 months prior to each applicable MCR outage date. Furthermore, under its cash call policy, BPLP’s major owners, TransCanada Energy Investments Ltd., a wholly owned subsidiary of TransCanada PipeLines Limited (rated A (low), Under Review with Developing Implications, by DBRS; 48.5% ownership) and BPC Generation Infrastructure Trust, an investment trust of Ontario Municipal Employees Retirement System (rated AAA with a Stable trend by DBRS; 48.5%), are committed to providing equity on a timely basis for all capital projects excluding outages (voluntary calls for sustaining capital). Cash calls are expected to cover over 70% of the budgeted capex in 2016.

RATING DRIVERS
The following factors could reasonably likely lead to a change in the credit rating: (1) material changes in capital project execution, (2) potential prolonged unplanned outages and (3) material changes in BPLP’s contractual/hedging position.

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 Independent Power Producer Industry, which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.