DBRS Confirms Hydro Ottawa Holding Inc. at “A”, Stable Trend

DBRS has today confirmed the rating of the Senior Unsecured Debt of Hydro Ottawa Holding Inc. (Hydro Ottawa or the Company) at “A” with a Stable trend. The rating is based on the Company’s low-risk business profile supported by a stable regulatory environment as well as its strong credit metrics, financial flexibility and franchise, with approximately 92% of EBIT generated from the regulated power distribution business. The rating also factors in the Company’s recent agreement to acquire three hydroelectric plants and a 38.3% interest in the Ring Dam at Chaudière Falls from Domtar Corporation for up to $45 million (Acquisition).

DBRS believes that the proposed Acquisition, expected to close at the end of August 2012, will not have a material impact on Hydro Ottawa’s business risk profile due to (1) the nature of low-cost hydro generation assets and (2) approximately 90% of the Company’s earnings still coming from its low-risk, stable electric distribution business post-Acquisition. DBRS expects the Acquisition to be financed with debt, which will cause the debt-to-capital ratio to increase modestly to around 47% from 42% (March 31, 2012). However, this ratio would still remain well within the regulatory capital structure of 60% debt and 40% equity, providing the Company with significant financial flexibility. Other key credit metrics, including debt-to-cash flow and interest coverage, are expected to remain in line with the “A” rating category.

The Company’s business risk profile is underpinned by a reasonable regulatory system. Hydro Ottawa’s distribution rates are set by the Ontario Energy Board (OEB) using a combination of an annual incentive regulation mechanism (IRM; 2009 to 2011) and periodic cost of service (COS) reviews (2012 in the rebasing year). In DBRS’s view, the IRM typically creates higher cost-cutting pressures than the COS. However, the cost pressure has not resulted in a material reduction in the Company’s earnings and cash flows. Hydro Ottawa’s exposure to non-regulated businesses is manageable at around 8% of consolidated EBIT. The non-regulated assets are largely low-risk hydro power generation facilities, and its power price risk has been effectively mitigated by having long-term contracts with creditworthy parties such as Ontario Power Authority (rated A (high) with a Stable trend by DBRS).

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

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