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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes rating of Bruce Power L.P. (BPLP or the Partnership) at BBB with Stable trends. The confirmation reflects BPLP’s (1) stable business risk profile and (2) continuing robust credit metrics for the past 12 to 18 months, both of which are consistent with the BBB-rating category. The Stable trends reflect DBRS’s view that no change to the business and financial fundamentals is expected for the next 12 months.

The BBB ratings are supported by BPLP’s (1) strategic value to Ontario’s electricity supply system; (2) high level of revenue and cost-recovery certainty, underpinned by the amended and restated Bruce Power Refurbishment and Implementation Agreement (the Implementation Agreement) with the Independent Electricity System Operator (IESO; rated A (high) with a Stable trend by DBRS); and (3) consistent operating track record and robust financial fundamentals. The Implementation Agreement provides price certainty on all electricity sold into the spot market and allows BPLP to recover all reasonable fuel and other operating costs. It will also cover reasonable capital costs associated with the life-extension project. Consequently, the Partnership’s operating performance is primarily driven by either capacity factor or generation level. The ratings are constrained by the inherent risk of operating a single-site nuclear power facility and the life-extension project for which major spending will start in 2020, which DBRS deems to have material cost overrun and delay risks.

For the last 12 months ended March 31, 2017, the key credit ratios (DBRS adjusted) remained at the high end of the BBB-rating category: cash flow-to-debt ratio of 40.4% (versus 15% to 35% for the BBB range); debt-to-capital ratio of 42.0% (versus 30% to 50% for the BBB range); and EBITDA interest coverage ratio of 17.6 times (x; versus 4.0x to 7.0x). In 2016, revenue and operating cash flow declined moderately year over year, driven primarily by a lower capacity factor of 81.2% (versus 84.7% in 2015). Nonetheless, the lower generation was caused by increased planned-outage days. The forced loss ratio of 2.0% remained very low for the year. In 2017, revenue and operating cash flow are expected to rebound, as capacity factor is expected to rise to around 90% as a result of reduced planned-outage days. The planned capital expenditures (capex; approximately $900 million) remain manageable relative to the size of operating cash flow (approximately $1.3 billion). DBRS expects the key credit metrics to stay stable at YE2017. For the past 12 to 18 months, the Partnership has significantly increased its dividends to the owners, which is part of BPLP’s plan to optimize its capital structure. The distributions were partially funded by issuing bonds of $1.75 billion in total. BPLP is now close to completing its $2.0 billion to $2.5 billion bond issuance target by 2021.

DBRS believes it is critical for BPLP to sustain an above-average financial profile to preserve the BBB rating in the midst of large and complex life-extension capital programs whereby BPLP will assume cost overrun risk. 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 strong and stable operating cash flow generating capacity. DBRS acknowledges that there are a number of measures under the Implementation Agreement to de-risk the project. Furthermore, the two high-quality majority owners are committed to funding major capex on a timely basis through cash calls.

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 principal methodology is Rating Companies in the Independent Power Producer Industry, which can be found on dbrs.com 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.