DBRS Confirms Hydro One Inc. at A (high), Stable Trend

DBRS has today confirmed the Issuer Rating and ratings of the Commercial Paper and Senior Unsecured Debentures of Hydro One Inc. (Hydro One or the Company) at A (high), R-1 (middle) and A (high), respectively, all 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 and renewable energy developments. The confirmation assumes that Hydro One’s transmission and distribution revenue base will continue to grow considerably to support its 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. In addition, the current rating is based on DBRS’s expectation that the implementation of the renewed regulatory framework in Ontario will not have a material impact on the credit profile of Hydro One (see DBRS commentary “No Real Credit Substance in the Ontario Energy Board’s Report on Renewed Regulation Framework for Electricity Distributors,” dated October 19, 2012).

Hydro One’s credit metrics have remained relatively stable over the past few years, supported by the growth in rate base. The Company continued to generate free cash flow deficits ($511 million in 2012) as a result of the ongoing high capex, which were financed through debt and dividend management. Hydro One expects capex to be approximately $1.6 billion for 2013. However, key credit metrics are expected to remain reasonable for the current rating category, with debt leverage maintained in the 55% to 60% range. Hydro One’s ratings are capped at one notch below the AA (low) rating of the Province of Ontario (the Province), which acts as a ceiling. If the Province’s rating is downgraded, negative rating action could be warranted for the Company. However, given that Hydro One is rated on a stand-alone basis, an upgrade of the Province’s rating would likely not result in an upgrade of Hydro One’s rating.

Notes:
All figures are in Canadian 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 applicable methodology is Rating North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.