DBRS Confirms Hydro Ottawa Holding Inc. at “A” with Stable Trends

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Debt rating of Hydro Ottawa Holding Inc. (Hydro Ottawa or the Company) at “A,” both with Stable trends. The ratings reflect the Company’s reasonable financial risk profile as well as the low business risk associated with its regulated electricity distribution business. However, DBRS is concerned over rising earnings and cash flows contributed from the higher risk non-regulated segment. Hydro Ottawa’s business risk profile could be negatively affected should non-regulated earnings exceed the 20% threshold for the current rating category (18.4% of 2013 EBIT).

Hydro Ottawa’s business risk profile of “A” is supported by the reasonable regulatory framework in Ontario and the relatively stable earnings and cash flows from the Company’s regulated operations (approximately 82% of 2013 EBIT). Hydro Ottawa currently operates under the 3rd Generation Incentive Rate Mechanism (IRM) but is expected to transition to 4th Generation Incentive Rate-setting (IR) or to Custom IR under the Ontario Energy Board’s Renewed Regulatory Framework. DBRS views the regulatory risk under the renewed framework as modestly higher than under IRM as the longer minimum term (four plus years versus three years) could potentially result in greater regulatory lag. This risk is partially mitigated by the ability of Hydro Ottawa to initiate a regulatory review if actual return on equity (ROE) is 300 basis points below the approved ROE.

Hydro Ottawa’s exposure to non-regulated earnings increased significantly in 2013, following the acquisition of three hydroelectric plants and a further 38.3% interest in the Ring Dam at Chaudière Falls (total Hydro Ottawa ownership: 67%) in late 2012. Earnings and cash flows from this segment are considered more volatile because of the greater associated volume risk. Commodity price risk for the Company is minimal as it has been mitigated through long-term fixed-price contracts with a creditworthy counterparty. However, increasing exposure to non-regulated operations remains a concern.

Hydro Ottawa’s financial risk profile is in the “A” rating range, supported by a reasonable balance sheet and strong credit metrics. All three of the Company’s key ratios weakened slightly in 2013 as a result of a considerable increase in debt to $410 million from $329 million in 2012. Although the Company’s debt-to-capital ratio may further deteriorate during this period of high capex in order to enhance the reliability of the system and expand generation capacity at Chaudière Falls (see DBRS press release, DBRS Comments on Hydro Ottawa’s Expansion at Chaudière Falls, dated March 7, 2014), DBRS expects Hydro Ottawa to continue to have reasonable financial flexibility for the current rating category going forward.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.