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) and the Commercial Paper rating at R-1 (low). All trends are Stable. The ratings of OPG are underpinned by its regulated electricity generation business under the Ontario Energy Board (OEB). The Stable trend reflects the steady cash flows generated by those assets as well as the Company's reasonable key credit metrics.

In November 2021, the OEB approved OPG's application for 2022 to 2026 regulated payment amounts. As per Ontario Regulation 53/05, OPG's regulated hydroelectric payment amounts will be frozen at 2021 levels for 2022–26. Payment amounts for regulated nuclear operations were determined largely through a continuation of the previous Custom Incentive Rate-setting framework. The OEB approved the Company's settlement proposal as filed, including a regulated nuclear revenue requirement of $16.0 billion and in-service capital additions of $8.6 billion over the five-year term. While the OEB disallowed $94 million of capital amounts already in-service, and OPG agreed to a 3% annual reduction to its non-Darlington-Refurbishment-related regulated nuclear operations, maintenance, and administration budget (a total of $277 million over the five-year term), overall, DBRS Morningstar considers the approval to be positive for the Company. The approval should provide stability for OPG's operations as well as certainty for the recovery of the remaining $6.4 billion of capital expenditures (capex) planned for the Darlington Refurbishment project (total capex of $12.8 billion). The Company has noted that the Darlington Refurbishment project remains on schedule and is tracking budget. However, should there be significant cost overruns that result in stranded costs, a negative rating action may occur.

OPG's earnings and cash flows decreased in 2021 because of lower nuclear generation as (1) planned outages in 2020 were delayed to 2021 in response to the Coronavirus Disease (COVID-19) pandemic, which contributed to higher earnings for 2020, and (2) Unit 3 of the Darlington Nuclear Generating Station was out for refurbishment. The Company's key credit metrics were strong for the current ratings and are expected to remain supportive even as debt increases moderately over the near term to fund the Darlington Refurbishment and other capex projects. DBRS Morningstar notes that a positive rating action is unlikely given OPG's business profile and the ongoing significant capex needs. However, a negative rating action may occur should key credit metrics deteriorate to a level no longer commensurate with the current rating category.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 24, 2021; https://www.dbrsmorningstar.com/research/384922); DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022, https://www.dbrsmorningstar.com/research/394683); and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022, https://www.dbrsmorningstar.com/research/393065), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

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@dbrsmorningstar.com.

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

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

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