DBRS Morningstar Assigns Ratings of “A” With Stable Trends to the Issuer Rating and Senior Unsecured Debentures of Hydro One Limited

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of "A" to Hydro One Limited (HOL or HoldCo). DBRS Morningstar also assigned a provisional rating of "A" to HOL's up to $425 million Senior Unsecured Debentures issuance. Both trends are Stable. The ratings on HOL are based on its 100% ownership of Hydro One Inc. (HOI or the Utility; rated A (high) with a Stable trend by DBRS Morningstar) as nearly 99% of HOL’s earnings and cash flows are provided by HOI. HOI is a regulated electricity transmission and distribution utility operating in the Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS Morningstar; 47.3% owner of HOL). The one-notch ratings differential between HoldCo and the Utility reflects structural subordination of debt at HOL to HOI.

The Utility provides almost all the earnings and cash flows of HoldCo. DBRS Morningstar considers the regulatory framework for HOI to be reasonable. Under the Ontario Energy Board (OEB), the Utility can recover all prudent expenditures and earn reasonable returns on equity (8.52% to 9.19% for 2020). Both HOI’s distribution and transmission operations are under a Custom Incentive Rate-setting (IR) framework where rates increase annually by a revenue cap index based on inflation, productivity, stretch, and capital factors. In April 2020, the OEB released its decision on the Utility’s 2020–2022 transmission revenue requirement application, approving the transition to Custom IR with a framework largely the same as for the distribution segment (2018–2022). DBRS Morningstar notes the approval will provide stability for HOI as well as certainty of funding for its capital expenditures program ($3.4 billion for transmission over the three-year term and $3.1 billion for distribution over the five-year term).

The Utility’s key credit metrics have been very stable and in line with the “A” rating category. For HOL, the nonconsolidated debt-to-capital metric was low at around 1.7% for 2019. DBRS Morningstar notes HoldCo intends to issue up to $425 million of debentures in order to repay $418 million of outstanding preferred shares held by the Province. Following the debt issuance, nonconsolidated leverage at HOL is expected to remain low at around 7.7%. DBRS Morningstar expects HoldCo’s nonconsolidated leverage to remain below 10% over the medium term, with distributions from HOI to HOL to be sufficient for HoldCo’s dividend requirements and interest payments.

As the ratings at HOL are based on the credit quality of HOI, HoldCo’s ratings will move in lockstep with the Utility’s ratings. A positive rating action is unlikely given HOI’s key credit metrics and the current regulatory framework. A negative rating action could occur if, on a sustained basis, the Utility’s cash flow-to-debt and debt-to-capital ratios weaken below the “A” rating category (respectively, below 12.5% and above 60% (13.7% and 56.6% as at December 31, 2019)) or nonconsolidated leverage at HoldCo exceeds the 20% threshold.

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 methodology is DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577