DBRS Takes Rating Actions on Series 2018-1 and Series 2018-2 Notes of Fair Hydro Trust

DBRS Limited (DBRS) took the following rating actions on the notes (collectively, the Notes) issued by Fair Hydro Trust (the Trust) following the recent announcement of Bill 87 being passed into law by Royal Assent on May 9, 2019, which will come into force on November 1, 2019:

-- 3.357% Senior Notes due May 15, 2033, Series 2018-1 downgraded to AA (low) (sf)
-- 3.52% Senior Notes due May 15, 2038, Series 2018-2 downgraded to AA (low) (sf)
-- 3.637% Subordinated Notes due May 15, 2033, Series 2018-1 downgraded to AA (low) (sf)
-- 3.834% Subordinated Notes due May 15, 2038, Series 2018-2 downgraded to AA (low) (sf)
-- 3.957% Junior Subordinated Notes due May 15, 2033, Series 2018-1 upgraded to AA (low) (sf)
-- 4.214% Junior Subordinated Notes due May 15, 2038, Series 2018-2 upgraded AA (low) (sf)

The rating actions remove the Notes’ ratings from their respective Under Review statuses.

On May 9, 2019, the Province of Ontario (Ontario or the Province; rated AA (low) with a Stable trend by DBRS) passed into law Bill 87, a bill amending the Ontario Fair Hydro Plan Act, 2017 (FHPA). When Bill 87 comes into force on November 1, 2019, payment obligations arising from the Notes issued by the Trust will become obligations of the Province rather than Ontario ratepayers. Pursuant to Bill 87, Ontario Power Generation Inc. (OPG; rated A (low) with a Stable trend by DBRS) will, among other things, continue to act as Financial Services Manager and be responsible for the Trust’s expenses due and payable after January 1, 2019. The Independent Electricity System Operator (IESO; rated A (high) with Stable trend by DBRS) will continue to be responsible for any Carrying Costs (including interest on the Notes) of the Trust until Bill 87 comes into force on November 1, 2019.

While the Limited Guarantee of the Province under the Change in Law Protection Agreement (the Protection Agreement) has not been triggered, Bill 87 amends the FHPA such that the Province will be responsible for making payments directly to the Trust in respect of the Trust’s funding obligations arising from the Notes under the relevant transaction documents. Accordingly, any payment obligations arising from the Notes issued by the Trust will become obligations of the Province. DBRS notes that the Protection Agreement will remain in place after Bill 87 comes into force. DBRS expects the relevant transaction documents governing the obligations of the transaction parties, including the Trust, OPG and the IESO thereunder, will be amended on or before November 1, 2019, to reflect the third-party support of the Province in respect of the payment obligations arising under the Notes. At that time, DBRS will review the proposed amendments to assess the impact they may have on the Notes.

The rating actions take into account the support of the Province pursuant to Bill 87, as contemplated in DBRS’s “Rating Canadian Structured Finance Transactions” Legislated Utility Collections appendix. They reflect the change in the Notes’ credit profile, as payments on the Notes will be made by the Province as they become due rather than from collections of Clean Energy Adjustments (including any True-Up Amounts that would have otherwise been calculated) charged to Specified Consumers. As the Notes will become obligations of the Province, the rating of the Notes is expected to track DBRS’s credit rating of the Province, as contemplated in the rating reports issued on the Notes’ respective closing dates, February 9, 2018, and April 24, 2018.

The Notes were originally placed Under Review on September 28, 2018, following public announcements by the Province that may trigger the Limited Guarantee as it relates to the FHPA and the Notes issued by the Trust. On January 10, 2019, DBRS maintained the Under Review status on the Notes as no legislative changes to the FHPA had been introduced nor had the Limited Guarantee been exercised. DBRS maintained the Under Review status on the Notes on March 26, 2019, when the Province introduced the first draft of Bill 87.

Notes:
The principal methodology is Rating Canadian Structured Finance Transactions (Appendix: Legislated Utility Collections), 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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

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