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

DBRS Limited (DBRS Morningstar) confirmed Hydro One Inc.'s (HOI or the Company) Issuer Rating and Senior Unsecured Debentures rating at A (high), and the Commercial Paper rating at R-1 (low). All trends are Stable. The credit ratings of HOI are based on its regulated electricity distribution and transmission operations in the Province of Ontario (the Province; 47.1%; rated AA (low) with a Positive trend by DBRS Morningstar), which operates under a reasonable regulatory framework by the Ontario Energy Board (OEB). The Stable trends reflect the Company's financial risk assessment, with all key credit metrics in line with the "A" credit rating category.

In November 2022, the OEB approved HOI's first Joint Rate Application for 2023 to 2027 transmission revenue requirement and distribution rates. The approved settlement agreement, which was largely based on a continuation of the previous Custom Incentive Rate-making framework, provides the Company with certainty of funding for its substantial capital expenditures (capex) program over the next five years. DBRS Morningstar notes that the Province has since directed HOI to develop additional transmission projects, such as the $1.2 billion Waasigan Transmission Line. As such, annual capex over the next five years is expected to average over $2.7 billion, up from $2.1 billion in 2022.

While HOI's financial risk assessment remains reasonable, the Company's key credit metrics may see pressure over the next few years because of the large capex spend. DBRS Morningstar expects HOI 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" credit rating category. However, a negative credit rating action may occur should key metrics weaken to a level that no longer supports the current credit ratings (i.e. debt-to-capital above 60% and cash flow-to-debt below 12.5% for a sustained period).

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 27, 2023; https://www.dbrsmorningstar.com/research/421106/global-methodology-for-rating-companies-in-the-regulated-electric-natural-gas-and-water-utilities-industry).

The following methodology has also been applied:
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196/dbrs-morningstar-global-criteria-commercial-paper-liquidity-support-for-nonbank-issuers).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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 credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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