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

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 account for virtually 100% of total earnings.

Regulation in Ontario has remained supportive for Hydro One. The Ontario Energy Board (OEB) is expected to continue to allow the Company to maintain coverage, cash flow and leverage ratios in line with the current rating category 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 considerably to support a high level of capital expenditure (capex), 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. On June 19, 2012, Hydro One’s Bruce to Milton Transmission line came in-service, which transports 3,000 megawatts (MW) of power from nuclear and wind facilities.

Hydro One’s credit metrics have remained relatively stable over the past four years. The Company generated a cash flow deficit of approximately $312 million for the six months ended June 30, 2012 (H1 2012), which was financed by debt. The deficit was largely driven by ongoing high capex attributable to the Advanced Distribution System project and infrastructure sustainability spending (expected spending of approximately $1.8 billion per annum for 2013 and 2014). As of June 30, 2012, Hydro One anticipates that capex for 2012 will be $165 million below the planned $1.8 billion due to changes in the cost and timing of certain transmission projects and lower distribution development. Key credit metrics are expected to remain reasonable for the current rating category with debt leverage maintained in the 55% to 60% range.

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 our website under Methodologies.