DBRS Morningstar Confirms Hydro Ottawa Holding Inc. at A (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of Hydro Ottawa Holding Inc. (Hydro Ottawa or the Company) at A (low). Concurrently, DBRS Morningstar confirmed the rating of Hydro Ottawa's commercial paper program at R-1(low). All trends are Stable. The confirmations reflect the continued strength and stability of the Company’s regulated electricity distribution operations, its steady performance and demonstrated resiliency over the course of the pandemic, and its reasonable financial risk profile. These are partly offset by its portfolio of generation assets that DBRS Morningstar views as riskier than the regulated business, whose contribution to Hydro Ottawa’s total EBIT is expected to remain above 30% on a continued, structural basis. DBRS Morningstar notes that this sustained increase in EBIT contribution from generation assets was the basis for the negative rating action that DBRS Morningstar took in 2020. In addition, the increased commercial focus on Envari, Hydro Ottawa’s energy services division, also has the potential to introduce a material, nonregulated business to the revenue mix.

Hydro Ottawa’s business risk profile continues to benefit from its stable regulated electricity distribution operations in the City of Ottawa (the City; 100% owner of Hydro Ottawa) despite the increased importance of its generation business. The stable and essential nature of this business underpinned Hydro Ottawa’s relative resilience to the effects of the coronavirus pandemic over 2020 and 2021, the largest of which were an increase in payment arrears at the height of the pandemic lockdown (but which has since largely leveled off), a relatively moderate increase of approximately $4 million in pandemic-related expenses, and a moderate delay of several months to the Hull Energy Refurbishment, which was completed in the first half of 2021. The Company’s stability is partly offset by its growing portfolio of nonregulated electricity generation assets. While these are largely supported by long-term contracts with the Independent Electricity System Operator (IESO; rated A (high) with a Stable trend by DBRS Morningstar), DBRS Morningstar notes that this business segment does involve higher volume and operational risk, leading to more volatile earnings and cash flows. Furthermore, in addition to the IESO contracts, certain generation offtake contracts, notably those situated in New York, are subject to a degree of merchant risk.

Hydro Ottawa’s financial risk profile weakened between 2018 and 2020 because of the Company’s large capital expenditure program for maintaining its distribution infrastructure, connecting new customers, and its Refurbishment projects. DBRS Morningstar notes that refurbishment of the generating facilities at Chaudière Falls North was completed in 2020 and at Hull Energy in Q2 2021. With the completion of the Hull project, the $290.5 million project debt issuance is anticipated to become nonrecourse by the end of 2021. DBRS Morningstar expects the Company’s key credit metrics to strengthen as distributions from the Refurbishments accrue to the Company and the $290.5 million of debt will be taken off the balance sheet while the July 2021 launch of Hydro Ottawa’s commercial paper program will reduce short-term borrowing costs. DBRS Morningstar will monitor the increasing mix of nonregulated revenues, primarily from the generation business but also from the energy services business, in its assessment of Hydro Ottawa’s business fundamentals. 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 nonregulated businesses, negative rating actions may occur.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 (October 27, 2020; https://www.dbrsmorningstar.com/research/368939), Rating Companies in the Independent Power Producer Industry (May 10, 2021; https://www.dbrsmorningstar.com/research/378166), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021: https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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