Ontario Power Generation Inc. has been on an asset-buying spree that is nearing C$5 billion as its bulks up its baseload assets and moves to increase returns for its sole shareholder, the provincial government.
The Toronto-headquartered company announced two deals in just over a month — the C$2.87 billion purchase of natural gas-fired plants owned by TC Energy Corp. on July 30 and a bid for U.S. hydroelectric developer Cube Hydro Partners LLC and its 385-MW portfolio that was unveiled June 25. Also in June, Ontario Power Generation, or OPG, reached an agreement with a subsidiary of ATCO Ltd. for the remaining 50% interest in the Brighton Beach Power Station it did not already own.
The batch of transactions comes after Ontario Power Generation, known as OPG, made a foray into U.S. markets in March when it completed its acquisition of 216 MW of small hydro plants from New Jersey's Eagle Creek Renewable Energy LLC for C$394.2 million.
The company, which is Ontario's largest power supplier, said future profits from the natural gas-fired plants "will stay in Ontario for the benefit of Ontarians," a reference to the Alberta-based companies from which they are being acquired. CEO Ken Hartwick, who was promoted to that role in April, was more blunt about the rationale behind the Cube Hydro deal, which he described in a June 25 statement as an "opportunity to grow our revenue base over the long term and provide increased returns to our shareholder, the Province of Ontario."
OPG's revenue-generating ability has been hampered amid government programs that forced the shutdown of all of its coal-fired generating plants and costly conversions of two former coal facilities to biomass. Those closures and the conversions — one of which was subsequently shuttered in 2018 after proving commercially unsuccessful — were part of climate change-mitigation plans enacted by a previous government. When control of the government shifted to the right-leaning Progressive Conservatives under Premier Doug Ford in 2018 a major revamp of the power market took place, which included cancellation of proposed renewables contracts solicited by Ontario's grid operator. Taking control of the gas-fired plants, which carry long-term contracts, will help OPG backstop intermittent renewables sources.
"The role that natural gas plays in maintaining system reliability has become even more important with the addition of intermittent wind and solar generation in recent years," Hartwick said July 30. "Natural gas is the partner or enabler of renewable energy, providing the flexibility required to ensure a reliable electricity system."
OPG's move to riskier, higher-return assets raised concern among credit rating agencies. While the company has no shareholders, its debt is considered independently of the provincial government, although the ratings companies acknowledge that the government would likely step in if OPG ran into difficulty. S&P Global Ratings moved its outlook on OPG debt to negative from stable in the wake of the purchase of the natural gas-fired plants, noting the transactions could add as much as C$4.6 billion to its debt in the next 12 months. OPG had combined long-term and short-term debt of about C$8 billion as of March 31.
DBRS Ltd. said it did not expect the purchase of the gas-fired plants, which will add 2,138 MW of capacity to OPG's portfolio, to affect the company's credit profile. While it views "non-regulated generation assets as having a weaker business risk profile than OPG's incumbent regulated assets and assets under regulatory-styled contracts, earnings and cash flows from the acquisitions are expected to be relatively stable, supported by long-term contracts with investment-grade counterparties," DBRS said in a July 31 note.
Most of the Cube Hydro assets are located in the U.S. Southeast and Eagle Creek's assets are in the mid-Atlantic region. OPG will operate them as part of its U.S. hydro business, which will provide operating synergies and enhanced opportunities for future capital spending, it said. The company operates a portfolio of large hydroelectric plants in Ontario.
"OPG has significant hydroelectric expertise in Ontario and in the U.S., so acquiring this portfolio of diversified, high-quality, long-life assets represents a natural fit for us," Hartwick said.
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