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

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Hydro Ottawa Holding Inc. (Hydro Ottawa or the Company) at “A” with Stable trends. The confirmations reflect the continued strength and stability of the Company’s regulated electricity distribution operations and its reasonable, albeit weakened, financial risk profile. This is partly offset by the growing portfolio of generation assets that DBRS views as riskier than the regulated business. DBRS notes that, for Hydro Ottawa, should EBIT from investments in the non-regulated segment exceed 20% (10.7% of 2017 EBIT), DBRS will begin to use the “Rating Companies in the Independent Power Producer Industry” methodology in addition to the “Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry” methodology.

Hydro Ottawa’s business risk profile is largely based on its regulated electricity distribution business in the City of Ottawa (100% owner of Hydro Ottawa). DBRS continues to view regulation under the Ontario Energy Board as supportive of the current ratings. The Company is currently in year three of a five-year Custom Incentive Rate-setting (IR) plan. Under Custom IR, Hydro Ottawa had forecast its annual capital expenditures (capex) requirement for the term of the plan, which is then added annually to the rate base, allowing the Company to begin recovering and earning on its investments immediately. DBRS views the Custom IR regime as mostly positive for Hydro Ottawa as it reduces regulatory lag and provides a level of certainty in terms of the recoverability of capex during this period of significant distribution infrastructure renewal and maintenance.

In August 2017, Hydro Ottawa placed in service a new 29-megawatt (MW) facility at Chaudière. Additionally, the Company has commenced two refurbishment projects of the generation infrastructure acquired from Hydro-Québec in 2016 (27 MW) and Domtar Corp. in 2012 (12 MW; collectively the Chaudière Hydro North and Hull Energy Refurbishments). DBRS remains concerned about Hydro Ottawa’s growing exposure to the non-regulated generation segment. DBRS typically views non-regulated generation as having higher risk than the regulated business because of the greater volume risk, which could result in more volatile earnings and cash flows. DBRS expects that following the completion of the Chaudière Hydro North and Hull Energy Refurbishments, EBIT from the non-regulated segment will likely breach the 20% threshold for the Company. Following the introduction of the “Rating Companies in the Independent Power Producer Industry” methodology, Hydro Ottawa’s ratings may be negatively affected.

Although Hydro Ottawa’s key credit metrics remain supportive of the current ratings, they weakened significantly in 2017 as the Company is currently financing the Chaudière Hydro North and Hull Energy Refurbishments on its credit facilities. The debt-to-capital and cash flow-to-debt ratios saw a modest recovery in the last 12 months ending March 31, 2018, but the cash flow-to-debt ratio remained weak for the current rating category. DBRS notes that the Company intends to ultimately finance the Chaudière Hydro North and Hull Energy Refurbishments through non-recourse debt. The Stable trends assigned to Hydro Ottawa factor into consideration that once the non-recourse debt is issued (expected to be in 2019), the ratios will immediately strengthen back to 2016 levels. However, should the Company’s metrics deteriorate to a level no longer commensurate with the current ratings, a negative rating action may occur.

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

The principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities (September 2017), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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