First public debt offering from OPG

Ontario power firm files to raise up to $2B

It has only one shareholder, has been a reporting issuer for more than 17 years, has at last count $ 4.39 billion of longterm debt, but has never accessed the public debt markets — until now.

Welcome to the world of Ontario Power Generation, which defines itself as “an Ontario- based electricity generation company whose principal business is the generation and sale of electricity” in that province.

Incorporated in late 1998, and one of the five companies that emerged from the April 1999, restructuring of the former Ontario Hydro, OPG is set to make its initial public debt offering.

It’s not clear how much the issuer — which in 2016 generated $5.7 billion in revenue and $ 453 million in net income on $ 44.4 billion in assets (a list that includes nuclear, hydro and thermal stations and wind power turbines) — intends to raise.

What’s known is that this month OPG filed a shortform base prospectus allowing it to raise $2 billion in medium-term notes over the next 25 months. The notes will be unsecured. OPG is rated A ( low) by DBRS and triple-B-plus by S&P Global. What’s also known is that investors like “new names” given the financial services and energy concentration in the local market.

Until its soon-to-be initial debt offering, the Ontario Electricity Financial Corp. ( OEFC) provided about 63 per cent of the financing needed by OPG. The rest of its debt is in the form of project finance. OEFC is one of the five entities formed when Ontario Hydro was restructured. One of its roles is to manage the debt, including financial risks and liabilities, of Ontario Hydro not transferred to other successor entities.

So why has OPG, whose electricity generation business is regulated by the Ontario Energy Board, whose annual capital expenditure program is about $1.5 billion and whose recent return on equity has been in the low single digits, decided to become a public debt issuer?

In marketing material prepared for that offering, OPG said that to support its “commitment to Ontario’s Fair Hydro Plan and invest in strategic priorities to help grow the company, OPG has established a $2-billion debt offering platform.”

Ontario’s Fair Hydro Plan became law in June and “permits the refinancing of certain electricity infrastructure costs and provides immediate rate relief to consumers.”

While the immediate rate relief ( for instance there’s a 25 per cent in 2017 followed by four years of growth at the rate of inflation) is enjoyable in the near term, it does come with a cost. (OPG is the financial services manager of the global adjustment charge, or GAC.)

For instance, the province’s Financial Accountability Office, has determined, under its methodology, the plan will cost the province $45 billion over 29 years while providing overall savings to electricity ratepayers of $24 billion.

“This results in a net cost to Ontarians of $ 21 billion,” concluded the report. ( OPG seems to agree with those numbers: in filed material it said the GAC deferral “would be about $2.5 billion per year on average over the first 10 years.”)

OPG plans to use the proceeds for general corporate purposes and to finance part of its investment in a bankruptcy-remote trust (Fair Hydro Financing Entity) set up as part of the Fair Hydro Plan.

Hydro One was another major company to emerge from the Ontario Hydro restructuring. It has been in the public markets since early 2000. Its initial public offering occurred in May 2000, when it raised $1 billion in a three- tranche offering. Last November it priced its 37th and 38th offering when it raised $500 million and $450 million respectively.