Ontario power firm seeks $2B debt raise in bid to help offset steep hydro costs
Program the first of its kind for OPG as it moves to advance ‘Fair Hydro Plan’
Ontario Power Generation Inc. on Friday filed a preliminary prospectus seeking to issue up to $2 billion in debt over a period of two years, in what would be an unprecedented public offering in connection with the province’s politically charged plan to borrow billions over the next decade to lower hydro bills.
According to the short-form base-shelf prospectus, OPG, which is wholly owned by the Ontario government, may issue up to $2-billion in unsecured, mediumterm notes with maturity terms of a year or more. The issuance would come over the next 25 months.
“We’ve done project financing in the market, but this is the first, I’d say, public debt program that we’re about to operate,” said OPG chief financial officer Ken Hartwick in an interview.
After the prospectus is reviewed, OPG will file an update with more details about the notes, such as their interest rate. The notes may be distributed by several financial institutions, the prospectus indicated, including ones tied to the Big Five Canadian banks.
OPG, one of Canada’s largest power companies, generates about half of Ontario’s electricity at two nuclear power plants and more than 60 hydroelectric stations.
Residents of the province have been subject to some of the highest electricity prices in North America, an issue that has sparked criticism of the governing Liberals.
While much of OPG’s borrowed money has come from another provincial entity, the Ontario Electricity Financial Corp., it is also a key player in the provincial Liberal government’s “Fair Hydro Plan” — a strategy to reduce electricity costs for consumers by an average of 25 per cent, including an eight-per-cent rebate that was announced in September 2016.
The Ontario government named OPG the financial services manager of the Fair Hydro Plan, allowing it to establish entities to assist it in helping fund some of the savings customers will receive. Hartwick said the likely plan is that the debt would be OPG’s, which it would then lend to a trust consolidated within the company, so the debt would still show up on OPG’s books.
“The intent is still to use OEFC but just give us another tool to be able to utilize to make sure we have the most cost-effective financing for the company,” said Hartwick, adding OPG could probably go to the debt markets as early as the coming weeks or months. The first drawdown, he said, would be related to OPG’s participation in the Fair Hydro Plan and general corporate uses.
OPG said in its second-quarter report that its board of directors “has conditionally approved OPG’s involvement with the Fair Hydro Plan on commercial terms,” with specifics still being ironed out. It also reported revenue of $2.32 billion and net income attributable to the shareholder of $367 million for the first six months of 2017.
The prospectus said a “significant portion of the Company’s investments in the (Fair Hydro Plan Act) Debt are expected to be funded through equity investments in OPG by the Province, with a portion of the investments to be funded from the Company’s available funds, including all or a portion of the proceeds of any offerings of Notes.”
As part of the government’s plan, it could be counting on OPG and the new OPG trust to finance somewhere around $13.75 billion of an estimated $25 billion that will be borrowed annually over the next 10 years, according to work done by Ontario’s Independent Financial Accountability Office (FAO). That would include money needed for interest payments.
The approximately $2.5 billion borrowed annually by the province, OPG and the OPG trust will go to pay a portion of the cost customers pay for their power. This will be paid back by electricity customers, starting about 10 years from now, via a charge on their power bill.
The Liberal government has referred to this part of its plan as a “refinancing ” capital investments in the electricity system. The Financial Accountability Office has said the Fair Hydro Plan will have a net cost to Ontarians of $21 billion.
Ontario electricity customers began receiving the full freight of the government’s average 25-percent price-cut as of July 1, but the plan has still been met with skepticism in some quarters. Some opposition politicians at Queen’s Park have referred to the Liberals’ Fair Hydro Plan as a “shell game.”
Liberal Premier Kathleen Wynne has admitted the plan “will cost a bit more,” but was worth it to offset steep costs facing consumers. Under Wynne’s watch, the Ontario government has also turned electricity distribution and transmission utility Hydro One into a publicly traded company, and sold just over half of it to other investors.
OPG, meanwhile, is in the midst of an estimated $12.8-billion overhaul of its Darlington nuclear power plant, located about 45 minutes east of Toronto. The company said Thursday that the refurbishment of the first reactor is now 25 per cent finished, “on time and within the approved budget.”
Hartwick noted that another Ontario nuclear company, Bruce Power, has done borrowings as well, and that OPG has a more diverse power portfolio. He said demand for debt from Bruce — which is a private-sector partnership that includes TransCanada Corp. and others, and which leases another nuclear power plant owned by OPG — had been good and that the bond market remains robust.
“The world changes, but I’d say based on what we’re seeing right now I think the receptivity will be strong,” for OPG’s notes, Hartwick said.