Ottawa River’s Power to Generate Cash Outweighs Credit Downgradeby
Hydro Ottawa still ‘very solid investment-grade company’
S&P says push into unregulated power is ‘riskier business’
The Ottawa River that enriched generations of lumber barons and political bosses is now valued for its electric power, with investors betting that cash stream will remain strong even after the city hydro company’s debt was downgraded for the second time in a year.
Hydro Ottawa Holding Inc.’s rating was cut last month by S&P Global Ratings to BBB+, still three steps above junk but its lowest grade since 2003. That affects the C$575 million ($437 million) of bonds in four issues that have been sold by the utility owned by the city government of Canada’s capital. Investors in the company’s largest bond, a C$200 million offering due in 2025, so far haven’t felt the pain of the downgrade, with a return of 2.8 percent this year that’s in line with the 2.7 percent on similar federal government debt.
Increasing revenue from river power with less-regulated pricing creates more risk than the traditional operations such as maintaining power poles, according to New York-based S&P. Hydro Ottawa is expanding the Chaudiere Falls generating station within sight of Parliament and bought other water sites in Ontario and New York State from Fortis Inc. The utility says that business may grow to make up about a quarter of its earnings.
“The company is still a very solid investment-grade company based on the way that we view risks in corporate debt,” said Steve Locke, head of fixed income at Mackenzie Investments in Toronto, overseeing C$15 billion of assets. Mackenzie has been one of the largest buyers of the company’s bonds, according to data compiled by Bloomberg. Locke said he was restricted from discussing any recent changes in holdings.
Other green power companies have also reported healthy investor demand, in an era where provincial and federal governments are making traditional power more expensive with carbon regulations and by offering subsidies and more favorable regulations to wind, water and solar projects.
“It is almost an unlimited demand it seems for solid, investment-grade fixed-income credit,” David Bronicheski, chief financial officer atc Algonquin Power & Utilities Corp. Utility companies pursuing acquisitions have led to more than 70 transactions raising money in the fixed-income market, surpassing last year, Bronicheski said Sept. 13 at the Bloomberg Canadian Fixed Income Conference in New York.
Ottawa Hydro Chief Financial Officer Geoff Simpson said the company will likely seek more bond-market financing in the next few years, part of regular plans to finance the operations of the power network.
“We don’t agree with the conclusion” of the downgrade, Simpson said in a phone interview. “We may see a rate impact with the BBB+ rating, but we really don’t feel constrained to go back to the market just because of this downgrade.” He also pointed to the company’s rating from Dominion Bond Rating Service, which left its grade been unchanged at A.
Hydro Ottawa has about 324,000 customers including 3,300 large commercial users. With about 700 employees and revenue of C$1.1 billion, it bills itself as Ontario’s largest municipal green power generator. The latest business plan from June forecast renewable generation climbing to 79 megawatts from 22 megawatts in 2012 and further growth to 128 megawatts next year when an expansion at Chaudiere Falls is finished. That would power about 107,000 homes.
“The unregulated power business is still a riskier business,” S&P Global Ratings analyst Andrew Ng said by phone from Toronto.
Simpson said he hasn’t heard any complaints from the city officials that manage the company since the ratings cut. Jan Harder, a city councillor who sits on the company’s board, didn’t provide a comment after a phone and e-mail message.
Few people in Ottawa would bet against the power of the river that built the area from a rugged lumber town that floated huge log rafts to local mills. The city next year also celebrates 150 years since Queen Victoria decided the river was good spot to found the capital of the new nation of Canada divided between Ontario’s anglophones Quebec’s French-speakers. Also one out of easy striking distance of America’s large armies after its Civil War.
The new power is secure because it’s being sold to large customers under fixed long-term contracts, Simpson said. The signature Chaudiere project has ties to the lumber industry, with some of the assets acquired from the Domtar paper company.
“Those are all in our mind very solid business decisions and will increase the cash flows of the company for many years in the future and within a very tolerable risk profile, primarily because of great hydrology on the Ottawa River,” Hydro Ottawa’s Simpson said.