DBRS Assigns Provisional Rating of A (high), Stable, to Independent Electricity System Operator

DBRS Limited (DBRS) has assigned a provisional Issuer Rat¬ing to the Independent Electricity System Operator (IESO) of A (high) with a Stable trend. The IESO’s rating reflects its strong ties with the Province of Ontario (the Province, rated AA (low)) and is closely aligned with the credit profile of the Province, as evidenced by the strong financial support from the Province. If the Province’s rating is downgraded (or upgraded), a negative (or positive) rating action may be warranted for the IESO.

In July 2014, the Ontario legislature passed Bill 14, amending the Electricity Act, 1998, which has amalgamated the prede¬cessor IESO with the Ontario Power Authority (OPA, rated A (high)). Effective January 1, 2015, the predecessor IESO and the OPA will operate as one new entity going forward under the IESO name and will continue to receive the same strong financial support from the Province. The combined entity will be responsible for both roles of its predecessors, which pri¬marily include: (1) to operate the wholesale electricity mar-kets in Ontario, (2) to direct the operation and maintain the reliability of the IESO-controlled grid and (3) to engage in ac¬tivities in support of the goal of ensuring adequate, reliable and secure electricity supply and resources in Ontario. DBRS ex¬pects that the combined entity will likely achieve sensible syn¬ergistic benefits, resulting in lower long-term operating costs.

Although the Province does not explicitly guarantee the IESO’s obligations, IESO receives strong financial support from the Province to cover its operating costs, as evidenced by the $95 million unsecured credit facility and the $90 million note pay¬able, both provided by the Ontario Electricity Financial Corpo¬ration (OEFC, rated AA (low)), a Crown agency of the Province. Upon the closing of the merger, the OPA’s $975 million credit fa¬cility will also continue with the IESO. The $975 million facility will continue to be used to primarily cover the Regulated Price Plan variance account balance. DBRS expects that any ad¬ditional liquidity will be provided by the OEFC and third-party financial institutions and that no Issuer debt will be issued.

The IESO operates under a reasonable regulatory/legislative en¬vironment where the Ontario Energy Board (OEB) reviews the IESO’s budgets to allow for full cost-of-service recovery through a rate charged on all electricity withdrawn in Ontario. DBRS views counterparty credit risk as manageable. In the event of a default in payment to the IESO from one or more market par¬ticipants, the IESO has the authority to impose a charge onto all remaining market participants in order to recover the defaulting amount.

Notes:
All figures are in Canadian dollars 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.

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

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2014), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related
Research at the right of the screen or by contacting us at info@dbrs.com.