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

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Debentures rating of Hydro One Inc. (Hydro One or the Company) at A (high), and the Commercial Paper rating at R-1 (middle). All trends are Stable. The ratings confirmation is underpinned by the Company’s low business risk profile, a supportive regulatory framework in Ontario and a strong financial profile sustained by stable earnings and cash flows. The Stable trend assumes that the regulatory regime under the Renewed Regulatory Framework will continue to remain reasonable, allowing the Company to earn adequate returns and pass through prudently incurred costs on a timely basis.

Hydro One’s business risk profile is indicative of an A (high) rating as the Company operates in an extensive franchise area, with regulated transmission and distribution businesses in Ontario accounting for substantially all its earnings. DBRS continues to view the regulatory framework in Ontario as reasonable for regulated transmission and distribution operators. In late 2013, the Ontario Energy Board released a final report on its Renewed Regulatory Framework, setting out policies and approaches to the rate adjustment parameters for incentive rate (IR) setting and the benchmarking of total cost performance. DBRS views the parameters of the Custom Incentive Rate-setting option under the Renewed Regulatory Framework as modestly positive for Hydro One’s distribution business (35% of EBIT) as it provides greater clarity for recovery and pass through of capital costs to ratepayers, and it reduces pressure on utilities to meet operating efficiency targets. However, this is somewhat offset by the modestly higher regulatory lag under the Custom IR regime, which the Company will operate under, as it has a minimum term of five years as compared with the previous three-year rate setting process. It also remains to be seen how operating expenses and capex will be scrutinized as the Company proceeds under the Custom IR framework.

Hydro One’s financial profile reflects an A (high) rating as key credit metrics have remained in the upper range of the “A” rating category. Hydro One’s ratings are on a stand-alone basis but are constrained by the rating of the Province of Ontario (the Province; rated AA (low)), which acts as a ceiling. DBRS assumes that Hydro One’s rate base will continue to grow and provide incremental cash flow to fund the majority of capex and maintain debt-to-capital at around 55%, with minimal regulatory lag and no significant cost-overruns.

Notes:
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 Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.