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

DBRS Limited (DBRS) has today 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 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 should EBIT from the non-regulated segment exceed the 20% threshold for the current rating (7.7% of 2016 EBIT), Hydro Ottawa’s ratings may be negatively affected.

Hydro Ottawa’s business risk profile remains supported by the Company’s regulated electricity distribution business within a strong franchise area (mainly the City of Ottawa). DBRS continues to view regulation under the Ontario Energy Board (OEB) as supportive of the current ratings, with Hydro Ottawa currently in the second year of its five-year Custom Incentive Rate-setting (Custom IR) plan. Under Custom IR, Hydro Ottawa’s capital expenditures (capex) for the 2016 to 2020 period was pre-approved by the OEB, providing a level of predictability for the Company as it undergoes a period of elevated capex to renew and maintain aging distribution infrastructure (average capex of $83 million per year). As well, capex completed during the term of the Custom IR is added annually to the rate base, allowing the Company to begin recovering and earning on its investments immediately and reducing regulatory lag.

DBRS remains concerned, however, by the Company’s growing exposure to the non-regulated electricity generation business. While most of Hydro Ottawa’s portfolio of generation assets have long-term power purchase agreements with creditworthy counterparties, such as the Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS), which mitigate commodity price risk, DBRS notes that there is still generally a greater level of volume risk versus the regulated distribution business, which could result in more volatile earnings and cash flows. With the Chaudière Falls Expansion expected to go into service later this year, EBIT from the non-regulated segment may approach the 20% threshold in the next few years. Should the Company breach the 20% threshold, the Company’s rating may be negatively affected.

Hydro Ottawa’s key credit metrics, while weaker in 2016, remained in line with the “A” rating category. With the continued large capex program for the regulated business, combined with the planned refurbishment of two additional hydroelectric plants on the Ottawa River, the Company’s key credit metrics may be pressured over the medium term. The Stable trends assigned to Hydro Ottawa factor into consideration that the Company will fund its capex in a prudent manner, including the use of non-recourse financing for its generation projects, in order to maintain its ratios in line with the current rating category. 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 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 principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2016), which can be found on dbrs.com under Methodologies.