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 trends are Stable. The confirmations reflect the regulated nature of HOI's transmission and distribution businesses, which provide a steady stream of earnings and cash flows. The Stable trends are based on the Company's key credit metrics, which are all in line with the "A" rating category.

In October 2022, HOI filed a settlement proposal with the Ontario Energy Board for its Joint Rate Application (JRAP) for 2023 to 2027 transmission revenue requirements and distribution rates. The settlement proposal, which is largely based on a continuation of the current Custom Incentive Rate-making (IR) framework, will be updated in mid-November to reflect the Ontario Energy Board’s (OEB) 2023 cost of capital parameters and inflation factor. DBRS Morningstar notes, if approved, the settlement proposal will provide stability for HOI's operations during the IR term, and certainty of funding for the significant capital expenditures (capex) program of around $11.8 billion. The OEB is reviewing the settlement proposal and a decision on the JRAP is expected by the end of 2022.

HOI's financial risk assessment continues to be reasonable for the A (high) ratings. The Company's key credit metrics have been stable over the past few years and in line with the "A" rating category. If the JRAP settlement proposal is approved, HOI's key credit metrics should remain supportive of the current ratings, albeit with some pressure on the cash flow-to-debt ratio because of the planned capex program. DBRS Morningstar expects the Company to continue to manage its capex and dividend requirements through a prudent mix of debt issuances and operating cash flows in order to maintain leverage in line with the regulatory capital structure and other key ratios within the "A" rating category. A negative rating action may occur if HOI's key credit metrics weaken to a level no longer commensurate with the current rating category for a sustained period, such as if the cash flow-to-debt ratio falls below 12.5% and the debt-to-capital ratio increases above 60%. A positive rating action is considered unlikely over the medium term given the Company's current business and financial risk profiles and the substantial capex program.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (https://www.dbrsmorningstar.com/research/402616; September 13, 2022), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (https://www.dbrsmorningstar.com/research/393065; March 1, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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