DBRS Morningstar Confirms Ratings of Hydro One Limited at "A," Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Hydro One Limited (HOL or HoldCo) at "A" with Stable trends. The ratings of HOL are based on its wholly owned subsidiary, Hydro One Inc. (HOI or the Utility; rated A (high) with a Stable trend by DBRS Morningstar), which provides 99% of HoldCo's earnings and cash flows. The one-notch ratings differential between HOL and HOI reflects structural subordination of debt at HoldCo to the Utility. The confirmation reflects the stability of the distributions from HOI to HOL and the low nonconsolidated leverage at HoldCo (6.9% as at December 31, 2020).

Since the most recent report, HOL's business risk assessment has been unchanged. In July 2020, the Ontario Divisional Court set aside the Ontario Energy Board's (OEB) decision on the treatment of HOI's deferred tax asset. The court found that the OEB’s decision was incorrect in law that the deferred tax asset should be shared with ratepayers; the court agreed with the Utility that it should be allocated entirely to shareholders. In April 2021, the OEB approved a refund of misallocated future tax savings of $257 million from ratepayers to shareholders over a two-year period beginning July 1, 2021. Additionally, DBRS Morningstar expects the deferred tax asset treatment to increase the Utility's cash flows by $50 million to $60 million annually which will further strengthen the stability of distributions to HoldCo.

In October 2020, HOL issued $425 million of Senior Unsecured Debentures and used the proceeds to repay the outstanding $418 million of preferred shares held by the Province of Ontario (rated AA (low) with a Stable trend by DBRS Morningstar; 47.3% owner of HOL). DBRS Morningstar had noted that, following the issuance, nonconsolidated leverage at HoldCo would remain low at around 7%. DBRS Morningstar expects HoldCo’s nonconsolidated leverage to remain below 10% over the medium term, with distributions to HOL from HOI 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. Additionally, while the Utility was able to achieve its operational and financial objectives despite challenges posed by the Coronavirus Disease (COVID-19) pandemic, significant uncertainty remains as the pandemic is still ongoing. 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% (12.7% and 56.1% as at December 31, 2020)) or nonconsolidated leverage at HoldCo exceeds the 20% threshold.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 2, 2020, https://www.dbrsmorningstar.com/research/369167), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

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.

DBRS Morningstar 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 [email protected].

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

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