DBRS Confirms Hydro Ottawa at “A”

DBRS has today confirmed the Senior Unsecured Debt of Hydro Ottawa Holding Inc. (Hydro Ottawa or the Company) at “A,” with a Stable trend. The rating confirmation reflects the Company’s strong financial profile, which has improved over the past five years; its conservative financial policies; and its strong operational performance and low business risk. DBRS views the Company’s customer mix, dominated by residential and commercial customers (including the federal government), as reasonably resilient in difficult economic conditions.

Hydro Ottawa’s financial metrics have continued to improve over the years and are quite robust. This is largely attributable to the strong financial performance of its regulated distribution business and its growing rate base, favourable rate decisions made by the Ontario Energy Board (OEB) and increased load demand. DBRS notes that the Company’s favourable customer mix (primarily residential customers, the federal government and the MUSH sector (i.e., municipalities, universities, schools and hospitals)) has insulated the Company from the economic downturn, which ultimately supports its strong operating performance and credit metrics.

In April 2010, the OEB approved Hydro Ottawa’s October 2009 application to set rates, which became effective May 1, 2010, using the 3rd Generation Incentive Regulation Mechanism (3rd Generation IRM) issued by the OEB. The decision resulted in a 0.18% increase from the 2009 base rates. Hydro Ottawa Limited (Hydro LDC) filed a full cost-of-service rate application with the OEB in June 2010, seeking approval for changes to rates effective January 1, 2011. The full cost-of-service application will include, among other things, an ROE deemed rate calculated by the OEB in September 2010. DBRS notes that in December 2009, the OEB changed its methodology for calculating ROEs and subsequently updated the parameters in February 2010 (see the OEB’s February 24 letter Cost of Capital Parameter Updates for 2010 Cost of Service Applications), which has resulted in an increase in the ROE to 9.85%, which is reflective of market conditions and rising bond yields.

Capital expenditures are expected to increase over the near term as the Company invests in a distribution system, technology and productivity initiatives and other programs. Capital expenditures are projected to be in the range of $70 million to $80 million per annum ($65 million to $70 million net of customer contributions), which is likely to result in negligible free cash flow deficits. These deficits will be financed through drawings under the Company’s $142.7 million bank facility ($50 million permitted for capital expenditures) and with cash on hand. As a result, DBRS believes that leverage will remain consistent with current levels, and cash flow-to-debt and interest coverage ratios will be flat to 2009.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas and Pipelines), which can be found on our website under Methodologies.