Ontario Power Generation reports 2012 second quarter financial results

Ontario Power Generation Inc. (“OPG” or the “Company”) reported its financial and operating results for the three and six months ended June 30, 2012. Net income for the second quarter of 2012 was $43 million compared to $109 million for the same period in 2011. Net income for the six months ended June 30, 2012 was $197 million compared to $262 million for the same period in 2011.

“In the first six months of this year, we continued to deliver safe, clean and reliable electricity that Ontarians expect, while driving down our costs. This was accomplished, in part, through the implementation of OPG’s ‘Business Transformation’ initiative. This initiative increases efficiency through improvement of processes and organizational restructuring, resulting in cost and headcount reductions,” said Tom Mitchell, President and CEO.

“At the same time, we continue to preserve and increase the capacity of Ontario’s publicly-owned assets for future generations. We made significant progress on a number of electricity generation projects. These generation projects are contributing to job creation and economic development in our host communities, with our First Nations and our industry partners.

“OPG is proceeding with the conversion of our Atikokan generating station from coal to biomass fuel. With more than 200 megawatts of capacity, the Atikokan generating station will be one of the largest biomass plants in North America generating renewable and dispatchable power.” Mr. Mitchell said.

The average revenue that OPG received for a kilowatt hour (“kWh”) of electricity in the second quarter of 2012 was 5.0 ¢/kWh compared to 5.3 ¢/kWh for the same period of 2011. This reduction in average price is due to lower Ontario spot market prices, and has had a significant negative impact on OPG’s revenue and income from its Unregulated – Hydroelectric segment. OPG’s revenue of 5.0 ¢/kWh is below prices currently paid by consumers under Ontario’s regulated price plan, which range from 6.5 ¢/kWh to 11.7 ¢/kWh.

Highlights

OPG’s net income in the second quarter of 2012 decreased by $66 million compared to the second quarter of 2011. The decrease was primarily due to lower earnings from the Nuclear Fixed Assets Removal and Nuclear Waste Management Funds (“Nuclear Funds”) and lower electricity spot market prices that significantly affected revenues from OPG’s unregulated hydroelectric stations. In addition, hydroelectric production was lower due to below normal water levels. The decrease in net income was partially offset by the recognition of a regulatory asset related to the approved 2012 ONFA Reference Plan, higher nuclear production and lower operations, maintenance and administration (“OM&A”) costs.

The decrease in net income of $65 million during the six months ended June 30, 2012 compared to the same period in 2011 was primarily due to lower electricity spot market prices and lower unregulated hydroelectric production. This decrease was partially offset by lower OM&A costs primarily due to the impact of variance and deferral accounts established by the OEB, and lower expenditures.

Total electricity generated during the three months ended June 30, 2012 was 20.5 terawatt hours (“TWh”) compared to 20.7 TWh for the same period in 2011. For the six months ended June 30, 2012, total generation was 42.5 TWh compared to 42.9 TWh in 2011. The decrease in electricity generation for the three and six month periods ended June 30, 2012 compared to the same periods in 2011 was primarily due to a decrease in unregulated hydroelectric generation resulting from below normal water levels in the Ottawa and northwestern Ontario river systems. The decrease in unregulated hydroelectric generation was partially offset by an increase in thermal generation mainly due to higher primary demand in Ontario, and higher nuclear generation.

The Darlington nuclear station continued to perform well with capability factors of 85.6 per cent and 90.6 per cent for the three and six month periods ended June 30, 2012, respectively. The capability factors decreased slightly compared to the same periods in 2011 due to an increase in unplanned outage days. The capability factors for the Pickering stations for the three and six month periods ended June 30, 2012 were 79.3 per cent and 78.1 per cent, respectively. The capability factors improved at the Pickering stations with a significant decrease in unplanned outage days compared to the same periods in 2011. The availability of OPG’s regulated and unregulated hydroelectric generating stations remained at high levels. The Start Guarantee rate of the thermal generating stations for the three and six month periods ended June 30, 2012 improved compared to the same periods in 2011, reflecting the ability of these stations to respond to market requirements when needed.

Generation Development

OPG is undertaking a number of generation development projects to support Ontario’s long-term electricity supply requirements. The status of these capacity expansion or life extension projects is as follows:

Nuclear

  • The planning phase of the Darlington refurbishment project continues to progress as design requirements for a third Emergency Power Generator and a Containment Filtered Venting System were issued in May 2012. The procurement process for the Turbine/Generator contract has been initiated. A Draft Environmental Assessment Screening Report on Darlington Refurbishment was issued by the Canadian Nuclear Safety Commission (“CNSC”), and Fisheries and Oceans Canada, which concluded that the refurbishment program and continued operations are not likely to cause adverse effects on the environment, taking into account the identified mitigation measures.
  • In June 2012, OPG entered into service agreements with Westinghouse and SNC Lavalin/CANDU Energy to prepare construction plans, schedules and cost estimates for new nuclear units at Darlington. The service agreements provide each company with 12 months to develop reports outlining their respective positions. The completed reports will be analyzed and provided to the Province for its consideration.
  • Work has advanced on the coordinated set of initiatives to evaluate the opportunity to continue the safe and reliable operation of Units 5 to 8 at the Pickering nuclear generating stations for approximately an additional four to six years beyond its nominal end of life. In June 2012, OPG submitted the necessary documentation related to the extension of the pressure tube service life to the CNSC. By the end of 2012, OPG expects to have the necessary evidence to demonstrate, with sufficient confidence, that the units will achieve the additional life as predicted.

Hydroelectric

  • The installation of the permanent concrete liner, as well as other lining and grouting activities continues at the Niagara Tunnel. The tunnel is expected to be completed within the approved budget of $1.6 billion, and by the approved completion date of December 2013. As at June 30, 2012, the life-to-date capital expenditures were $1.3 billion.
  • The Lower Mattagami River project continues to progress. During the first half of 2012, concrete work was in progress at the Smoky Falls, Little Long and Harmon sites. The cofferdam installation was completed at the Kipling site. The project is expected to be completed within the approved budget of $2.6 billion and by the approved completion date of June 2015. As at June 30, 2012, the life-to-date capital expenditures were $1.0 billion.

Thermal

  • OPG and the Ontario Power Authority (“OPA”) have executed the Atikokan Biomass Energy Supply Agreement for the conversion of the Atikokan generating station to biomass fuel. OPG has approved the full release of the project, which is now in the execution phase. OPG and the OPA are in discussions regarding an Energy Supply Agreement for the conversion of the Thunder Bay thermal generating station to natural gas.
  • As outlined in Ontario’s Long-Term Energy Plan and Supply Mix Directive to the OPA, OPG continues to explore the possible conversion of some units at the Lambton and Nanticoke generating stations to natural gas, with an option for co-firing with biomass, if required for Ontario’s system reliability.

FINANCIAL AND OPERATIONAL HIGHLIGHTS 1

















































     
  Three Months Ended June 30 Six Months Ended June 30
(millions of dollars – except where noted) 2012 2011 2012 2011
Earnings        
  Revenue 1,125 1,202 2,324 2,486
  Fuel expense 165 183 357 349
  Gross margin 960 1,019 1,967 2,137
  Operations, maintenance and administration 669 684 1,304 1,392
  Depreciation and amortization 142 180 331 328
  Accretion on fixed asset removal and nuclear waste management liabilities 176 177 363 350
  Earnings on nuclear fixed asset removal and nuclear waste management funds (110) (164) (320) (302)
  Other net expenses 17 2 24 3
  Income before interest and income taxes 66 140 265 366
  Net interest expense 31 38 63 76
  Income tax (recovery) expense (8) (7) 5 28
  Net income 43 109 197 262
Income before interest and income taxes        
  Generating segments 128 136 285 380
  Nuclear Waste Management segment (64) (14) (40) (48)
  Other segment 2 18 20 34
  Total income before interest and income taxes 66 140 265 366
Cash flow        
  Cash flow provided by operating activities 101 151 212 554
Electricity generation (TWh)        
  Regulated – Nuclear 11.7 11.4 24.2 24.0
  Regulated – Hydroelectric 4.8 5.0 9.7 9.6
  Unregulated – Hydroelectric 3.3 4.1 6.9 8.1
  Unregulated – Thermal 0.7 0.2 1.7 1.2
  Total electricity generation 20.5 20.7 42.5 42.9
Average sales prices and average revenue (¢/kWh)        
  Regulated – Nuclear Generation 5.5 5.5 5.5 5.5
  Regulated – Hydroelectric 3.5 3.5 3.5 3.6
  Unregulated – Hydroelectric 2.0 3.1 2.1 3.2
  Unregulated – Thermal 2.0 2.1 2.0 2.9
  Average revenue for all electricity generators, excluding OPG 2 9.2 8.8 9.0 8.4
  Average revenue for OPG 3 5.0 5.3 5.0 5.3
Nuclear unit capability factor (per cent)        
  Darlington 85.6 86.2 90.6 92.0
  Pickering 79.3 72.3 78.1 75.2
Availability (per cent)        
  Regulated – Hydroelectric 90.0 87.5 91.1 89.7
  Unregulated- Hydroelectric 94.0 94.3 93.0 94.1
Start Guarantee rate (per cent)        
  Unregulated – Thermal 97.6 94.6 4 97.8 94.3 4
Return on equity for the twelve months ended June 30, 2012   and December 31, 2011 (per cent) 5     3.2 4.0
Funds from operations interest coverage for the twelve months   ended June 30, 2012 and December 31, 2011 (times) 5     2.9 3.1

 OPG has adopted United States generally accepted accounting principles (“US GAAP”) for the presentation of its consolidated financial statements, effective January 1, 2012.  Financial information derived from the consolidated financial statements for the 2011 comparative periods has been adjusted to US GAAP. 2  Revenues for other electricity generators are computed as the sum of hourly Ontario demand multiplied by the hourly Ontario electricity price (“HOEP”) plus total global adjustment payments plus the sum of hourly net exports multiplied by the HOEP less OPG’s generation revenue. Includes other energy revenues primarily from cost recovery agreements for the Nanticoke, Lambton, and Lennox generating stations and revenue from Hydroelectric Energy Supply Agreements for the hydroelectric generating stations. As estimated. 5 “Funds from operations interest coverage” and “Return on equity” are non-GAAP financial measures and do not have any standardized meaning prescribed by US GAAP.  Additional information about these measures is provided in OPG’s Management’s Discussion and Analysis for the period ended June 30, 2012, under the heading, Supplementary Non-GAAP Financial Measures.

Ontario Power Generation Inc. is an Ontario-based electricity generation company whose principal business is the generation and sale of electricity in Ontario.  Our focus is on the efficient production and sale of electricity from our generation assets, while operating in a safe, open and environmentally responsible manner.

Ontario Power Generation Inc.’s unaudited consolidated financial statements and Management’s Discussion and Analysis as at and for the three and six month periods ended June 30, 2012, can be accessed on OPG’s Web site (www.opg.com), the Canadian Securities Administrators’ Web site (www.sedar.com), or can be requested from the Company.