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 confirmations reflect the stability of the distributions from HOI to HOL and the low nonconsolidated leverage at HoldCo (6.9% as at December 31, 2021).

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 and HOL'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.

Debt at HOL currently consists of $425 million of Senior Unsecured Debentures maturing in October 2027. Leverage at HoldCo has remained low at 6.9% in 2021, and is expected to remain less than 10% over the medium term. DBRS Morningstar continues to expect 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 current business and financial risk profiles, and its substantial capex program. 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, less than 12.5% and more than 60.0%; 15.2% and 55.1% for the 12 months ended June 30, 2022) or nonconsolidated leverage at HoldCo exceeds the 20% threshold for a sustained period.

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 Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (https://www.dbrsmorningstar.com/research/404334; October 26, 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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