DBRS Changes Trends on Hydro Ottawa Holding Inc. to Negative, Confirms Ratings at “A”

DBRS Limited (DBRS) changed the trends on the Issuer Rating and Senior Unsecured Debt rating of Hydro Ottawa Holding Inc. (Hydro Ottawa or the Company) to Negative from Stable; both ratings were also confirmed at “A.” The confirmations reflect the continued strength of the Company’s regulated electricity distribution operations. The Negative trends reflect Hydro Ottawa’s growing non-regulated electricity generation business (25.6% of 2018 EBIT, from 7.5% in 2017), which DBRS considers higher risk than the regulated business. As EBIT from investments in the non-regulated segment has significantly exceeded the previously stated 20% threshold, DBRS has introduced 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 in its assessment of Hydro Ottawa.

Hydro Ottawa’s business risk profile continues to benefit from its stable regulated electricity distribution business in the City of Ottawa (100% owner of Hydro Ottawa). However, this is partly offset by the Company’s growing portfolio of non-regulated electricity generation assets. Earnings from Hydro Ottawa’s non-regulated business increased significantly in 2018 with of a full year’s contribution from the 29-megawatt (MW) facility at Chaudière Falls (completed in August 2017). While earnings from non-regulated operations are expected to decrease for 2019 during the Chaudière Hydro North and Hull Energy Refurbishments (the Refurbishments; total of 39 MW), DBRS estimates that following the Refurbishments, non-regulated operations will, on average, contribute around 30% to 35% of total annual EBIT. DBRS considers this to be a material and permanent shift in the business mix of the Company going forward, hence the introduction of the “Rating Companies in the Independent Power Producer Industry” methodology. While Hydro Ottawa’s generation assets are largely supported by long-term contracts with the Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS), this business segment does involve higher volume and operational risk when compared to the Company’s incumbent regulated business and could potentially result in more volatile earnings and cash flows. DBRS will likely downgrade the ratings of Hydro Ottawa by one notch to A (low) and change the trends back to Stable from Negative following the completion of the Refurbishments in mid-2020 as non-regulated operations will then represent a significant portion of the Company’s operations.

Hydro Ottawa’s financial risk profile weakened in the last 12 months ending March 31, 2019, because of the large capital expenditures program for maintaining distribution infrastructure, connecting new customers and the Refurbishments. DBRS notes the Company issued around $290.5 million of project-level debt in July 2019 to finance the Refurbishments. This project debt will become non-recourse to Hydro Ottawa once it reaches the recourse release dates (expected by year-end 2020) after the completion of each refurbishment. DBRS then expects the Company’s key credit metrics to strengthen. However, should the Company’s key credit metrics deteriorate to a level no longer commensurate with the current rating category, considering the mix of the regulated and non-regulated businesses, further negative rating actions may occur.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2018) and Rating Companies in the Independent Power Producer Industry (May 2019), which can be found on dbrs.com under Methodologies & Criteria.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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