DBRS Confirms Ratings of Hydro One Inc.

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Unsecured Debentures rating of Hydro One Inc. (HOI or the Company,) at A (high), and the Commercial Paper (CP) rating at R-1 (low). All trends are Stable. The rating confirmations reflect the Company’s low business risk profile resulting from the supportive regulatory framework in Ontario and a reasonable financial profile sustained by predictable earnings and cash flows. The Stable trends assume that the regulatory regime will continue to remain transparent and supportive, allowing the Company to earn adequate returns and recover prudently incurred costs on a timely basis.

DBRS rates HOI as a stand-alone entity and does not assume any credit support from its owner, Hydro One Limited (HOL, 84% owned by the Province of Ontario (the Province, rated AA (low), Stable trend by DBRS)) or from the Province. In November 2015, the Province transferred its ownership of HOI to its wholly owned newly established corporation, HOL, and partially monetized approximately 16% of its ownership of HOL through an initial public offering (IPO) (please refer to the DBRS press release “DBRS Confirms Issuer Rating and Debt Ratings of Hydro One Inc. Downgrades Commercial Paper Rating” dated November 5, 2015, for more details). On April 4, 2016, HOL announced a secondary offering of an additional 15% of its common shares by the Province. DBRS notes that there is no impact on the business risk profile of HOI’s regulated utility business resulting from HOL’s IPO and the secondary offering, as HOI’s low-risk business profile continues to be supported by a reasonable regulatory framework and operations in an extensive franchise area. The Company’s transmission business (approximately 60% of 2015 EBIT) operates approximately 96% of the Province’s electricity transmission network and distribution business (approximately 40% of 2015 EBIT) and services nearly 26% of the total customers in Ontario. HOI’s transmission and distribution business operate under a cost-of-service model approved by the Ontario Energy Board, which permits the Company to charge rates for its services that allow it to recover the costs of providing its services and earn an allowed return on equity.

HOI’s balance sheet and key credit metrics remained reasonable for the current rating category. However, credit metrics could be pressured, as DBRS expects HOI’s dividend payout ratio to remain high in order to meet HOL’s dividend objectives to pay approximately 70% to 80% of its consolidated net income as dividends. DBRS expects the Company to continue generating free cash flow deficits over the medium term, resulting from the high capex and dividends, requiring the Company to have a greater reliance on borrowings. DBRS further expects HOI’s internally generated cash flow to fund the majority of capex and dividends while maintaining DBRS adjusted debt-to-capital below 60% and cash flow-to-total debt at or above 15%. HOI’s ratings could be affected should its cash flow-to-debt ratio weaken further from the current level and its DBRS adjusted debt-to-capital exceeds 60% on a sustained basis.

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 methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on the DBRS website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.