DBRS Confirms Hydro One at A (high) and R-1 (middle), Stable Trend

DBRS has today confirmed the Senior Unsecured Debentures and Commercial Paper ratings of Hydro One Inc. (Hydro One or the Company) at A (high) and R-1 (middle), respectively, both with Stable trends. The rating confirmation is based on the Company’s low-risk regulated transmission and distribution businesses, a supportive regulatory environment in Ontario and the Company’s strong financial profile. Hydro One’s regulated transmission and distribution businesses in Ontario accounts for virtually 100% of total earnings.

Regulation in Ontario has remained supportive for Hydro One. The Ontario Energy Board is expected to continue to allow the Company to maintain adequate coverage, cash flow and leverage ratios due to the government’s commitment to address Hydro One’s aging infrastructure while meeting the continued growth of electricity consumption and renewable energy developments in the province without compromising reliability. The confirmation assumes that Hydro One’s transmission and distribution revenue base will continue to grow favourably to support a high level of capital expenditure, which is expected to continue to far exceed depreciation. Project execution risk is expected to be manageable; the Company is experienced in managing projects and is focused on mitigating the risk of cost overruns.

Hydro One’s credit metrics have remained relatively stable over the past four years. The Company generated a cash flow deficit of approximately $451 million in 2011, which is debt-financed. The deficit was largely driven by the ongoing high capex attributable to smart meter and infrastructure sustainability spending. As a result of the ongoing high investment commitment ($1.8 billion per annum for the 2012-2014 period) and resulting incremental debt issuances, DBRS expects a temporary, modest weakening of Hydro One’s key credit metrics over the next several years. However, these ratios are expected to gradually recover when substantial capex plans are completed, and should remain well within the A (high) rating category.

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

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on the DBRS website under Methodologies.