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

DBRS Limited (Morningstar DBRS) confirmed Ontario Power Generation Inc.'s (OPG or the Company) Issuer Rating and Unsecured Debt credit rating at A (low) and its Commercial Paper credit rating at R-1 (low). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
Morningstar DBRS' credit ratings on OPG are based on the Company's regulated generation business, which operates under a reasonable regulatory regime under the Ontario Energy Board. The Stable trends reflect the Company's key credit metrics, which remain reasonable despite the complex and substantial capital expenditures (capex) program.

Morningstar DBRS notes that OPG has a number of large capital projects ongoing. The Darlington Refurbishment Project, with total capex of $12.8 billion, is on track and on schedule. The start of Unit 4 marks the last of the four units being refurbished in Darlington, Ontario, and is scheduled to be returned to service in 2026. The Pickering Refurbishment Project, which aims to refurbish Units 5-8 of the Pickering Nuclear Generating Station (GS), is anticipated to return the units to service by the mid-2030s. In January 2025, the Province of Ontario (the Province; 100% owner of OPG; rated AA with a Stable trend by Morningstar DBRS) approved OPG's plan to proceed with the project definition phase as the next step toward the refurbishment. OPG expects Darlington's Small Modular Reactor (SMR) Unit 1 to begin commercial operation by the end of 2030. OPG is also planning for three additional SMRs at the Darlington site. On April 4, 2025, the Canadian Nuclear Safety Commission granted OPG a licence to construct one SMR. Additionally, the wholly owned subsidiary Atura Power, as part of OPG's nonregulated segment, is constructing several growth capex projects. With the electrification of the economy and the expected increase in electricity demand in the Province, the Company also intends to pursue opportunities to increase generation capacity such as through the Independent Electricity System Operator request for proposals or the development of hydro sites throughout the Province.

CREDIT RATING DRIVERS
Morningstar DBRS believes a positive credit rating action is unlikely over the medium term because of the Company's business profile and the ongoing significant and complex capex program. Morningstar DBRS could take a negative credit rating action if there were cost overruns resulting in significant stranded costs and lack of support from the Province.

EARNINGS OUTLOOK
OPG expects earnings in 2025 to be higher than in 2024, reflecting the positive impact of a full year of the Darlington GS Unit 1 returning to service and no other major outages planned at Darlington. Overall, Morningstar DBRS expects future earnings volatility to come from (1) forecast risk as part of the regulatory process; (2) macro factors such as weather, unexpected outages, and the Province's economic conditions; and (3) variability in water flows and wholesale electricity prices for uncontracted facilities.

FINANCIAL OUTLOOK
Given these ongoing projects, OPG has forecast capex to increase to approximately $5 billion in 2025 from $3.5 billion in 2024. Morningstar DBRS expects capex to remain at this level for at least the near term, which will likely result in substantial net free cash flow deficits that will require debt financing. Morningstar DBRS notes that the Company is exploring additional credit supportive funding sources, which would reduce its debt needs. While most of OPG's projects are regulated and will be added to the Company's rate base when completed, there is significant execution risk because of the complexity and scale of the projects. Morningstar DBRS has factored into OPG's current credit ratings that its key credit metrics will weaken moderately over the medium term, and expects the key credit metrics to remain reasonable for the A (low) credit rating. Morningstar DBRS will continue to monitor progress on the Darlington Refurbishment, the Pickering Refurbishment, and the SMR project and expects that the Company will not undertake any major capex without having financing and a cost-recovery mechanism in place to minimize the financial risks.

CREDIT RATING RATIONALE
OPG's credit ratings are supported by the reasonable regulatory framework that provides stable cash flow, support from the Province, and limited nuclear waste management liabilities. This is offset by nuclear generation risk, risk of political intervention, the significant capex program, and a high cost base that has historically resulted in reductions in allowable costs through regulated rate setting.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at (August 13, 2024) https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of OPG, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of OPG, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of OPG, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (November 25, 2024), https://dbrs.morningstar.com/research/443429

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153

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@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website (https://dbrs.morningstar.com/understanding-ratings).

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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