DBRS Morningstar Confirms Ratings of Hydro One Inc. at A (high)/R-1 (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Hydro One Inc. (HOI or the Company) at A (high) and the Commercial Paper rating at R-1 (low), all with Stable trends. The confirmations are based on HOI's stable regulated distribution and transmission operations under the Ontario Energy Board (OEB), which provides a steady stream of earnings and cash flow for the Company. The Stable trends reflect HOI's key credit metrics which are expected to remain supportive of the current ratings.

HOI's business risk assessment continues to be based on the transparent and supportive regulatory regime in Ontario. The Company is allowed to recover prudently incurred costs in a timely manner and earn an adequate return on equity. HOI's distribution segment operates under a Custom Incentive Rate-setting (IR) plan for 2018 to 2022. The Company's transmission segment will be transitioning to a Custom IR regime for 2020 to 2022; a decision from the OEB is expected in Q2 2020. Under Custom IR, HOI's capital expenditures (capex) program for the next three years will be pre-approved by the OEB. DBRS Morningstar notes that this is positive for the Company as it will provide certainty of funding for the high amount of capex planned ($1.9 billion for 2020) and allow HOI to start to recover and earn a return on its investments between rebasing years, thus reducing regulatory lag.

DBRS Morningstar expects the ongoing Coronavirus Disease (COVID-19) pandemic will likely result in modestly lower earnings and operating cash flow for HOI in 2020. Although a majority of the distribution segment's revenues are from residential customers and so should remain stable, lower collections from commercial and industrial customers will negatively affect cash flow. Additionally, lower average monthly peak demand during this period will also likely lead to a decrease in earnings for the transmission segment. Overall, DBRS Morningstar still expects HOI's key credit metrics to remain relatively stable and in line with the current rating range. The Company's cash flow-to-debt metric has been pressured for the rating category as a result of its increasing debt to finance the large capex program and the dividend requirements. The weakness in this metric has been offset by the stronger EBIT-interest coverage and debt-to-capital ratios, although leverage has also increased over the past five years. Given HOI's key credit metrics and the regulatory framework, DBRS Morningstar considers a positive rating action to be unlikely. However, a downgrade could happen if the cash flow-to-debt ratio weakens to a level no longer commensurate with the current rating category (below 12.5%) and the debt-to-capital ratio exceeds 60% on a sustained basis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (September 2019), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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