Hydroelectric

Moodys reviews Hydro One for possible upgrade

Toronto, January 27, 2003 — Moody’s Investors Service announced that it has placed the long-term debt ratings of Hydro One Inc. under review for possible upgrade.

This action follows the Government of Ontario’s recent decision to terminate its search for a strategic partner for Hydro One and instead to retain 100 per cent control of the company for the stated purpose of protecting consumers.

Moody’s view, originally articulated at the time that the company’s initial public offering was cancelled, is that any ownership structure that would result in the appearance of a tighter credit bond with the Province could lead to a Hydro One rating closer to that of the Province. Moody’s rates the Province’s bonds Aa2 and has an issuer rating of Aa2 on the Province.

The ratings affected are the A2 ratings assigned to Hydro One’s long-term senior unsecured debt obligations. The Prime-1 rating assigned to Hydro One’s commercial paper is confirmed.

Since the spring of 2002, Hydro One has been challenged by the increasing politicization of the Ontario electricity market.

The government reversed its decision to sell the company outright through an initial public offering; an entire board of directors of the company resigned; the former Chief Executive Officer was relieved; the government reversed its position on competitive, floating rates for the retail market; the government initiated a review of the mandate of the Ontario Energy Board and most recently the Premier of Ontario announced that the Government will no longer seek a strategic partner for the company and will instead retain 100 per cent control of Hydro One.

The review will encompass an assessment of the Government’s strategy relative to the ownership of Hydro One and the company’s role as an instrument of public policy. Moody’s will also consider the company’s strategic direction in the context of the changes at the board and senior management levels.

Moody’s will also consider possible changes in the regulatory environment flowing from the ongoing review of the Ontario Energy Board’s mandate and the company’s ability to sustain appropriate cash flow performance across a wide range of revenue scenarios.

It will also consider the proposed restructuring of certain of the company’s debt currently held by Ontario Electricity Financial Corporation (“OEFC”), an agency of the Government of Ontario. The preliminary analysis indicates that it is unlikely there will be any adverse financial implications from the restructuring and therefore Moody’s would view it as credit neutral. This view is predicated on the absence of any negative political, regulatory or accounting impacts.

Operationally Hydro One benefits from the strong and stable cash flow provided by its transmission and distribution operations, however, its financial profile suffers from a relatively high degree of financial leverage relative to its peer group.

Hydro One’s management team is clearly focused on improving the efficiency of operations and reducing costs having announced the combination of the company’s two largest operating subsidiaries, Hydro One Networks and Hydro One Network Services effective January 1, 2003.

Hydro One is a holding company whose principal businesses are electricity transmission and distribution. The company owns and operates the largest transmission and distribution system in Ontario and one of the 10 largest systems in North America.