DBRS Confirms All Ratings of Bruce Power L.P. at BBB with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Notes rating of Bruce Power L.P. (BPLP or the Partnership) at BBB with Stable trends. The rating confirmations reflect BPLP’s (1) stable business risk profile and (2) its continuing robust credit metrics that are consistently at or above the upper end of the BBB rating category. The Stable trends reflect DBRS’s view that no material changes to BPLP’s business and financial fundamentals are expected for the next 12 months.

For 2018 and the past 12 months to March 31, 2019, EBITDA of $1.3 billion was lower than the record level of $1.5 billion accomplished in 2017 as a result of a slightly lower capacity factor of 86.7% (versus 88.0% in 2017) and higher operating cost caused by increased outage days. Nonetheless, the financial results were consistent with management’s guidance and historical performance. Key credit metrics remain at or above the upper end of the BBB rating category for DBRS’s rated independent power producers. For the past 15 months, dividend distributions to owners continued at an elevated level. The resultant free cash flow deficit was funded by equity injections and bond issuances, which was long planned by the Partnership to optimize its capital structure. To date, net bond issuances of $2.25 billion are now close to management’s targeted level of $2.5 billion by 2021. By 2018 year end, the independent electricity system operator (IESO; rated A (high) with a Stable trend by DBRS) verified and agreed to the fully scoped cost of the Unit 6 life-extension project, which is recoverable pursuant to the 2015 amended and restated Bruce Power Refurbishment and Implementation Agreement (the Implementation Agreement). The project, scheduled to commence in early 2020, is currently advancing as expected. For 2019, EBITDA is expected to rise, driven by a step-up in contract price to recover the costs of the Unit 6 life-extension project. Consequently, key credit metrics are expected to be strong for the next 12 months.

The BBB ratings are underpinned by BPLP’s (1) strategic value to the Province of Ontario’s (the Province; rated AA (low) with a Stable trend by DBRS) power supply system, which was reaffirmed in the Province’s updated 2017 long-term energy plan; (2) the high level of revenue and cost-recovery certainty, supported by the 2015 Implementation Agreement with the IESO; and (3) a consistent track record of operating and financial performances. The Implementation Agreement provides price certainty on electricity sold to the spot market and allows BPLP to recover all reasonable fuel and other operating costs. It also covers reasonable capital costs associated with the life-extension projects of Units 3 to 8 for the next 15 years or so. Consequently, the Partnership’s financial results are primarily driven by the actual power generation, which in turn is driven by the capacity factor.

BPLP’s credit ratings are constrained by the inherent risk of operating a single-site nuclear power facility and the life-extension projects to commence in earnest from 2020. DBRS believes it is critical for BPLP to sustain above-average credit metrics to preserve the BBB ratings amid the complex nuclear fleet refurbishment projects that are expected to last for more than a decade, whereby BPLP will assume cost overrun and delay risks. The Partnership has started investing in life-extension activities for Units 3 to 8, and capex is expected to ramp up after 2020 and peak at around $1.6 billion in 2027 (completed in 2033). DBRS believes BPLP is in a good position to execute this project. This is partly because of the Partnership’s capacity to continue generating strong and stable operating cash flow. DBRS acknowledges that there are a number of measures under the Implementation Agreement to de-risk the project. Furthermore, the two high-credit-quality majority owners are committed to funding major capex on a timely basis through capital calls.

DBRS expects the BPLP credit ratings to remain Stable for the next 12 months. A ratings upgrade in the next couple of years is unlikely given the complex life-extension projects that will kick into high gear in 2020. On the other hand, a ratings downgrade would likely be triggered by (1) a significant and sustained deterioration of credit metrics or (2) material cost overruns and delays associated with the upcoming life-extension projects.

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

The principal methodology is Rating Companies in the Independent Power Producer Industry (May 2019), which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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