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 Industry” methodology are not a material consideration for the rating of the IESO.

On March 21, 2019, the Province introduced Bill 87, Fixing the Hydro Mess Act, 2019, which includes the unwinding of the Fair Hydro Plan. Although DBRS had not expected the Fair Hydro Plan to have a material impact on the IESO’s rating, DBRS noted that there was a possibility, albeit unlikely, that a shortfall accumulated to the IESO as a result of the rate reduction under the Fair Hydro Plan could increase beyond the credit facility limit. DBRS notes that this risk was eliminated following a Transfer Payment Agreement with the Province in December 2018, with the IESO currently invoicing the Province for each month’s shortfall. Once Bill 87 is passed, the Fair Hydro Plan will be replaced with an on-bill rebate directly on customer bills beginning November 1, 2019.

In March 2019, the Province additionally directed the IESO to deliver energy-efficiency programs, currently delivered by local distribution companies, under an Interim Framework. This is not expected to have a material impact on the credit quality of the IESO as the funds will be fully recovered through the Global Adjustment Mechanism. DBRS believes either a positive or a negative rating action for the IESO to be unlikely in the near term. A negative rating action could occur, however, if there are unfavourable legislative or regulatory changes that hinder the IESO’s ability to fully pass on costs to market participants.

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 & Criteria.

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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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