OPG’s multi-billion-dollar gas-plant buying spree partly prompted by shifting nuclear landscape: CEO
The chief executive of Ontario Power Generation Inc. says the company’s recent multi-billion-dollar shopping spree was undertaken with returns for its government shareholder in mind, but also with an eye to maintaining economies of scale ahead of the planned shutdown of its Pickering, Ont., nuclear station.
The provincially owned electrical company’s dealmaking culminated in an approximately $2.87-billion agreement, announced late last month, to buy two Ontario gas plants — and half of a third plant in which it already held a 50 per cent stake — from Calgary-based TC Energy Corp., the former TransCanada.
The acquisitions (expected to close in late 2019, pending regulatory approvals) are in addition to a $200-million deal to take full ownership of a fourth gas plant — this one in the Windsor, Ont.-area — in which it also previously held a 50 per cent stake. OPG is buying the stake from ATCO Ltd.-subsidiary Canadian Utilities Ltd., which has been shedding its Canadian fossil-fuel-based power-plant portfolio.
“We think there’s a very good earnings stream off of the assets … all of which goes to the benefit of Ontario taxpayers,” said Ken Hartwick, OPG’s president and CEO. “Although not a direct offset to Pickering, it also factors into our thinking as to our relative size in the province and how we can use that to benefit ratepayers.”
Combined, the four gas plants possess nearly 2,700 megawatts of electricity-generating capacity, or about 14 per cent of the projected demand for electricity in Ontario as of noon on Tuesday. One of the four, in Napanee, Ont., is still under construction.
Hartwick, who took over as OPG’s CEO in April after serving as chief financial officer for three years, said the company’s interest in buying the natural gas assets was influenced by its confidence as an operator and its knowledge of the Ontario market. OPG provides nearly half of Ontario’s daily power, making it the biggest electricity generator in the province.
“I think on any technology or any asset, if you don’t think you can technically operate something, you shouldn’t own it,” Hartwick told the Financial Post in a phone interview. “So we were comfortable there.”
OPG also announced a deal in June to buy an operator of hydropower facilities in the eastern United States, which had an enterprise value of US$1.1 billion and followed OPG’s acquisition of another U.S.-based hydroelectric operator last year.
The acquisitions come ahead of the planned commercial shutdown in 2024 of OPG’s Pickering nuclear power plant. The generating station, located in the eastern part of the Greater Toronto Area, “accounts for approximately 14 per cent of Ontario’s electricity needs,” the utility says.
OPG operates another nuclear plant east of Pickering, the Darlington station, which is currently in the midst of a closely watched, multibillion-dollar reactor refurbishment. Another major rebuild is set to kick off next year at the nuclear station operated by Bruce Power L.P., a partnership of TC Energy, an infrastructure arm of the OMERS pension fund and two labour unions.
All of the above have left Ontario facing a possible capacity crunch. The province’s Independent Electricity System Operator has noted “a capacity need will arise in 2020” and will potentially grow in 2023 as long-term power-producing contracts start to expire and as nuclear reactors go offline.
“At the outset of summer 2023, additional capacity may be required in addition to outage coordination to ensure sufficient generation to serve Ontario’s demand needs,” the IESO stated in a recent forecast.
Hartwick expects gas plants to become a bigger energy provider for the province post-2024. In 2018, oil and gas sources accounted for six per cent of Ontario’s transmission-connected generator output, according to the IESO. Nuclear accounted for 61 per cent.
“When you have all that activity going on around multiple units, then the gas assets become more important to the system,” Hartwick said.
OPG reported a profit attributable to its provincial shareholder of nearly $1.2 billion last year, with Hartwick saying the “significantly under-levered” company will tap debt markets to fund portions of its recent transactions.
The utility is also poised to take a break from its dealmaking, as its CEO suggested the focus will now turn more towards integrating the incoming assets.
“I’d say this will definitely be a pause for us until we get these integrated,” he said.
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