DBRS Confirms Independent Electricity System Operator at A (high) with a Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating of the Independent Electricity System Operator (IESO) at A (high) with a Stable trend. The rating is based on (1) the implicit support provided by the Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS); (2) the comprehensive legislative framework; and (3) the reasonable regulatory regime for the IESO, under which it can recover all its operating costs. The IESO also maintains sufficient liquidity in the form of credit facilities to meet its objectives. DBRS notes that as the IESO is a non-profit entity, the key credit metrics under DBRS’s “Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Methodology” are not applicable to the rating of the IESO.

On March 2, 2017, the Province announced the Fair Hydro Plan. Under the Fair Hydro Plan, electricity rates in the Province decreased 25% beginning July 1, 2017, with the IESO recording the monthly shortfall (as a result of the rate reduction) in a regulatory variance account and funding this by drawing on a $2 billion credit facility provided by the Ontario Financing Authority (the OFA, an agency of the Province). Any drawn balance on the credit facility is expected to be reduced as the IESO transfers the regulatory asset to the Fair Hydro Trust (rated AAA (sf) by DBRS) in exchange for cash equal to the amounts transferred. For any regulatory asset balance not transferred, the IESO will be allowed to levy a charge on consumers, subject to approval by the Ontario Energy Board, for its full recovery beginning May 1, 2021.

The Fair Hydro Plan is not expected to have a material impact on the IESO’s rating as (1) the regulatory asset balance accumulated to the IESO is expected to be transferred on a periodic, if not monthly, basis and is not expected to exceed the credit facility limit; and (2) under Bill 132, “Fair Hydro Act, 2017” (the Fair Hydro Act), the IESO has the right to fully recover any amount recorded in its regulatory variance account from consumers. DBRS notes that, while unlikely, the balance accumulated to the IESO could increase beyond the current credit facility limit as the Fair Hydro Trust is not obligated to purchase the regulatory asset from the IESO. The current rating factors in DBRS’s expectation that in the event the accumulated regulatory asset does grow toward, or above, $2 billion, the IESO can increase the limit on its Province-provided credit facility due to the strategic importance of the IESO and the Fair Hydro Plan to the Province, and as any disruptions to the IESO could negatively affect the functioning of the electricity market and the Province.

Additionally, with the implementation of the Fair Hydro Plan, DBRS now believes that the Province provides implicit support to the IESO as: (1) the Province had historically provided indirect financial support in the form of credit facilities and debt through its agents, the OFA and the Ontario Electricity Financial Corporation (rated AA (low) with a Stable trend by DBRS); (2) the right for the IESO to recover any shortfall accumulated in its regulatory variance account was enacted by the Province through legislature (the Fair Hydro Act); and (3) the Province provided the $2 billion credit facility, through the OFA, to the IESO.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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