Morningstar DBRS Confirms Hydro One Inc.'s Issuer Rating and Senior Unsecured Debentures at A (high) and Commercial Paper at R-1 (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Hydro One Inc.'s (HOI or the Company) Issuer Rating and Senior Unsecured Debentures credit rating at A (high) and its Commercial Paper credit rating at R-1 (low). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
HOI's credit ratings are based on its regulated electricity distribution and transmission operations in the Province of Ontario (rated AA with a Stable trend), which operates under a reasonable regulatory framework by the Ontario Energy Board, and its financial risk assessment, with all key credit metrics in line with the "A" credit rating category. 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 HOI's operations to be stable for at least the next three years as the Company 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 the Company's business and financial risk profiles. Morningstar DBRS may take a negative credit rating action 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).

FINANCIAL OUTLOOK
HOI's key credit metrics have been in line with the "A" credit rating category. While Morningstar DBRS expects the Company's metrics to remain supportive, Morningstar DBRS notes that there may be some pressure in the medium term because of the capex program. HOI's dividend payout has also been high to support the dividend policy of its parent, Hydro One Limited (rated "A" with a Stable trend; target payout ratio of approximately 70% to 80% of consolidated net income). Overall, Morningstar DBRS expects the Company 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.

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

CREDIT RATING RATIONALE
HOI's credit ratings are supported by the reasonable regulatory framework it operates under, its extensive franchise area, and a reasonable financial profile. This is partly offset by the high level of planned capex, high dividend payouts, and earnings sensitivity 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 HOI, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of HOI, 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 HOI, 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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