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; (2) strong financial and operating performances over the past 15-month period ended March 31, 2018, driven primarily by the high energy production levels; and (3) robust credit metrics consistently at or above the high-end of the BBB rating category. The Stable trends reflect DBRS’s view that no material change to BPLP’s business and financial fundamentals is expected for the next 12 months.

For the last 12 months ended March 31, 2018, key credit ratios (DBRS adjusted) remained at or above the high end of the BBB rating category for independent power producers: cash flow-to-debt ratio of 51.0% (versus 15% to 35% for the BBB range); debt-to-capital ratio of 44.0% (versus 30% to 50% for the BBB range); and EBITDA interest coverage ratio of 17.0 times (x) (versus 4.0x to 7.0x for the BBB range). In F2017, revenue and operating cash flow increased significantly year over year to record levels, primarily driven by the higher capacity factor of 88.0% (versus 81.2% in 2016) and the energy price escalator under the long-term contract. The higher capacity factor was a result of the reduced number of planned and unplanned outage days. The forced loss rate, which reflects unplanned outages, reduced further to 1.7% in the year. For the past 12 months to 18 months, dividend distributions to partners continued to stay at an elevated level. The resultant free cash flow deficit was funded by bond issuance, which was long planned by the Partnership to optimize its capital structure. BPLP has now issued $2.5 billion bonds in aggregate, which is close to its targeted level of $2.5 billion to $3.0 billion by 2021.

The BBB ratings are underpinned by BPLP’s (1) strategic value to the Province of Ontario’s (the Province; rated AA (low), Stable by DBRS) electricity supply system, which was reaffirmed in the Province’s updated 2017 long-term energy plan; (2) high level of revenue and cost-recovery certainty, supported by the amended and restated Bruce Power Refurbishment and Implementation Agreement (the Implementation Agreement) with the Independent Electricity System Operator (rated A (high), Stable by DBRS); and (3) consistently good track record of operating and financial performances. The Implementation Agreement provides price certainty on all 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 project. Consequently, the Partnership’s financial results are primarily driven by electricity production levels, which are measured by the capacity factor.

The ratings are constrained by the inherent risk of operating a single-site nuclear power facility and the life-extension project to commence in 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 project that will last for 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 generate 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 cash calls.

DBRS expects the 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 project that kicks into high gear in 2020. On the other hand, a ratings downgrade would likely be triggered by (1) a significant and sustained deterioration of financial metrics; (2) material cost overruns and delays associated with the upcoming life-extension project; and (3) significant increase to the leverage, resulting in credit metrics at the lower end of the BBB rating category.

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

The principal methodology is Rating Companies in the Independent Power Producer Industry (May 2017), which can be found on dbrs.com under Methodologies.

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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If
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