DBRS Comments on Hydro Ottawa’s Expansion at Chaudière Falls

DBRS notes that Hydro Ottawa Holding Inc. (Hydro Ottawa or the Company; rated “A” with a Stable trend) has today announced the construction of a 29-megawatt (MW) facility at Chaudière Falls (the Expansion). This project, which is contracted under a 40-year Power Purchase Agreement with the Ontario Power Authority (rated A (high)), will increase the total installed hydroelectric capacity of the Company to 58 MW.

DBRS has carried out an analytical review of the impact of the Expansion on the Company. Overall, DBRS views this transaction as negative.

(1) BUSINESS RISK PROFILE – Negative
Based on its review, DBRS views the Expansion as negative to Hydro Ottawa’s business risk profile as post-Expansion, the Company’s earnings and asset mix from the more volatile, non-regulated electric generation business are expected to increase (earnings from the non-regulated segment represented approximately 9% of EBIT in 2012). While there is uncertainty regarding the magnitude of the increase, this uncertainty is somewhat mitigated by the long-term contract with a creditworthy counterparty. However, should non-regulated earnings exceed the 20% threshold for the current rating category, the Company’s business risk profile could be negatively affected.

(2) FINANCIAL RISK PROFILE – Neutral
The impact of the Expansion on Hydro Ottawa’s financial risk profile is neutral despite the financing plan not yet being finalized. DBRS anticipates the Company’s debt-to-capital ratio post-Expansion to remain well within the parameters of the “A” rating category (52% at September 30, 2013), even if the Expansion is fully funded through debt financing, which would provide the Company with some financial flexibility. In addition, other key credit metrics are expected to still be commensurate with the current rating category. DBRS will continue to monitor the progress of the Expansion and will provide more information as appropriate.

Notes:
The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, and Rating Companies in the Non-Regulated Electric Generation Industry, which can be found on our website under Methodologies.