DBRS Comments on the Closing of Hydro Ottawa’s Acquisition

DBRS notes that Hydro Ottawa Holding Inc. (Hydro Ottawa or the Company; rated “A” with a Stable trend) has today announced the closing of its acquisition of three hydroelectric plants and a 38.3% interest in the Ring Dam at Chaudière Falls from Domtar Corporation for $46 million (the Acquisition). The Acquisition will immediately increase the Company’s capacity at Chaudière Falls by 21 megawatts (MW), with the potential to expand to more than 40 MW.

DBRS has carried out an analytical review of the impact of the Acquisition on the Company, focusing on: (1) the business risk profile of Hydro Ottawa and (2) the financial impact of the Acquisition on the Company’s credit profile. Overall, DBRS views this transaction as credit neutral.

(1) BUSINESS RISK PROFILE – Neutral
Based on our review, DBRS views the Acquisition as neutral with respect to Hydro Ottawa’s business risk profile due to the following: (1) the Acquisition is viewed as non-material due to its relative size; (2) post-Acquisition, approximately 90% of the Company’s earnings still come from its low-risk, stable electric distribution business; and (3) the nature of the low-cost hydro generation assets and long-term contracts with creditworthy counterparties.

(2) FINANCIAL RISK PROFILE – Neutral
Based on DBRS’s review of the Acquisition and its financing impact, Hydro Ottawa’s financial profile remains reasonable for the current rating category. Pro-forma the Acquisition, the debt-to-capital ratio is expected to increase to approximately 48% as at September 30, 2012 (assuming 100% debt financing), which still provides the Company with significant financial flexibility. Hydro Ottawa’s debt-to-capital ratio remains well within the parameters of the “A” rating category. In addition, other key credit metrics, post-Acquisition, are also commensurate with the current rating category.

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 the DBRS website under Methodologies.