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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Unsecured Debt rating of Ontario Power Generation Inc. (OPG or the Company) at A (low) as well as OPG’s Commercial Paper (CP) rating at R-1 (low), all with Stable trends. The ratings of OPG are based on the Company's stable regulated operations under the Ontario Energy Board, which contribute stable cash flow. The ratings are also supported by the continued financial support from the shareholder, the Province of Ontario (Ontario or the Province; rated AA (low) with a Stable trend by DBRS Morningstar), which, through its agent, the Ontario Electricity Financial Corporation (rated AA (low) with a Stable trend by DBRS Morningstar), provides 37% of the Company's consolidated debt. OPG's remaining debt includes nonrecourse project financing (35%), CP (1%), and the Senior Notes issued under the Medium Term Note Program (27%).

In July 2019, the Company announced it had acquired the remaining 50% interest in the Brighton Beach Generating Station for $200 million and was in the process of acquiring three natural gas–fired assets in Ontario for $2.9 billion. In October 2019, OPG also completed its acquisition of Cube Hydro Partners, LLC and Helix Partners LLC (collectively, Cube Hydro) for USD 845 million. At the time, DBRS Morningstar noted that these acquisitions have a higher business risk than the Company's incumbent regulated assets because (1) the Cube Hydro assets face merchant power risk and thus more volatile cash flows, and (2) the natural gas–fired assets in Ontario are non-regulated, albeit under long-term contracts with strong investment-grade counterparties that should generate relatively stable cash flows. While the acquisitions are expected to be fully debt funded and lead to around a $4 billion increase in debt load, the overall impact on OPG's credit will be minimal because regulated operations and assets under regulatory-style contracts will continue to contribute over 80% of EBITDA, while the cash flow-to-debt and debt-to-capital metrics are forecast to remain strong for the A (low) ratings. DBRS Morningstar notes that the Company has indicated that growth in its non-regulated business will be at a more moderate pace following these acquisitions, with most planned capital expenditures (capex) for its regulated operations. However, should OPG pursue acquisitions that result in a significant shift in the EBITDA mix between regulated and non-regulated operations or lead to credit metrics deteriorating to a level no longer supportive of the current rating category, DBRS Morningstar may take negative rating action.

In March 2020, OPG announced the completion of construction on Unit 2 of the Darlington Refurbishment project (the Darlington Refurbishment), with Unit 2 scheduled to return to service in Q2 2020. While the $12.8 billion project was on budget and on schedule, the Company announced it would postpone refurbishment on the next unit because of the ongoing Coronavirus Disease (COVID-19) situation. As such, this may lead to a delay in the schedule and a modest increase in costs. DBRS Morningstar does not expect the decision to defer the Unit 3 refurbishment to affect OPG in achieving its operating and financial results in 2020. DBRS Morningstar continues to view a positive rating action as unlikely in the short term because of the ongoing capex program, including that for the Darlington Refurbishment. A downgrade could occur should there be significant cost overruns with the Darlington Refurbishment that result in stranded costs.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2019), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2019), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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