Morningstar DBRS Confirms Hydro One Limited's Issuer Rating and Senior Unsecured Debentures at "A," Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Hydro One Limited's (HOL or HoldCo) Issuer Rating and Senior Unsecured Debentures credit rating at "A" with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
HOL's credit ratings are supported by its wholly owned subsidiary, Hydro One Inc. (HOI or the Utility; rated A (high) with a Stable trend), which provides 99% of HoldCo's earnings and cash flows. The one-notch credit rating differential between HOL and HOI reflects structural subordination of debt at HoldCo to the Utility. The Stable trends reflect HOL's reasonable financial risk assessment. HOI is currently in the second year of its five-year Custom Incentive Rate-making framework which covers 2023 to 2027. Given this, Morningstar DBRS expects the Utility's operations to be stable for at least the next three years as HOI has certainty of funding for its substantial capital expenditures (capex) program (average capex of $2.8 billion over four years).

CREDIT RATING DRIVERS
A positive credit rating action is unlikely given HOI's credit ratings. A negative credit rating action is possible if Morningstar DBRS downgrades the Utility's credit ratings. Morningstar DBRS may also take a negative credit rating action should debt at HOL increase materially so that key metrics weaken to a level that no longer supports the current credit ratings (i.e., debt-to-capital above 65% and cash flow-to-debt materially below the 12.5% threshold for a sustained period).

FINANCIAL OUTLOOK
HOL's key credit metrics have been reasonable for the current credit ratings. While Morningstar DBRS expects HoldCo's metrics to remain supportive of the "A" credit ratings, Morningstar DBRS notes that there may be some pressure in the medium term because of the Utility's capex program. Morningstar DBRS expects HOI to continue to be prudent in managing its debt and distributions to maintain its leverage in line with the regulatory capital structure of 60% debt. Additionally, debt at HOL currently consists of $425 million of Senior Unsecured Debentures maturing in October 2027. Morningstar DBRS continues to expect distributions to HOL from HOI to be sufficient for HoldCo's dividend requirements and interest payments. As HOI is effectively the only source of cash flow for HOL, HoldCo's credit ratings will move in lockstep with the Utility's credit ratings.

EARNINGS OUTLOOK
HOL's earnings have been steady, supported by the reasonable regulatory environment, extensive franchise area, and diverse customer base. Overall, Morningstar DBRS expects HoldCo's earnings to continue to grow annually at a stable pace in line with the Utility's rate base.

CREDIT RATING RATIONALE
HOL's credit ratings are supported by the reasonable regulatory environment HOI operates under, the Utility's extensive franchise area, a reasonable financial profile, and the strong and stable cash flows from HOI. This is partly offset by structural subordination of debt at HoldCo to the Utility, the high level of planned capex, reliance on a single source of revenue and high dividend payout, and sensitivity of earnings to volume and costs.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of HOL, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of HOL, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of HOL, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (June 27, 2024), https://dbrs.morningstar.com/research/435127

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186; and
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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