Morningstar DBRS Confirms East-West Tie's Credit Ratings at A (low) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed East-West Tie Limited Partnership's (East-West Tie or the Company) Issuer Rating and Senior Secured Debt rating at A (low) with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
East-West Tie's credit ratings are based on the Company's regulated electricity transmission operations in the Province of Ontario (rated AA with a Stable trend by Morningstar DBRS), which contribute 100% of its earnings, offset by a weaker financial risk assessment. The Stable trends reflect the expected steady stream of earnings and cash flows.

Morningstar DBRS considers the regulatory framework under the Ontario Energy Board (OEB) to be supportive of the current ratings. East-West Tie is regulated under a Custom Incentive Rate-Setting (IR) regime where it can recover all prudent costs and earn a reasonable return on equity (8.34% for 2022 to 2027). With respect to the Company's application to the OEB related to additional COVID-19 related costs, the Company agreed to a regulatory disallowance of $30.0 million of its $111.7 million in incremental construction costs. The settlement terms included the addition of the remaining $81.7 million of assets to the rate base, $48.7 million for the Construction Cost Variance Account (CCVA) and the establishment of a new Debt Rate Variance Account (DRVA). As previously stated, Morningstar DBRS notes that this non-cash regulatory disallowance had no impact on the key credit metrics as they had been fully funded through equity.

CREDIT RATING DRIVERS
A positive rating action may occur if the Company improves its cash flow-to-debt ratio to the "A" credit rating category (i.e. above 12.5%) for a sustained period. Morningstar DBRS considers a negative credit rating action to be unlikely given the business risk assessment but could occur if East-West Tie's cash flow-to-debt ratio weakens below 8% on a sustained basis.

EARNINGS OUTLOOK
East-West Tie's earnings increased in 2024 following the $21.8 million approved base revenue adjustment for 2024-27, and an additional $19.5 million adjustment particularly for 2024. Additionally, East-West Tie's revenue requirements during the Custom IR term will escalate annually by a revenue cap index based on an inflation factor less a stretch factor. As such, Morningstar DBRS expects the Company's earnings to be very predictable and stable over the medium term.

FINANCIAL OUTLOOK
Morningstar DBRS expects East-West Tie's cash flows to be stable as well, tracking the net income. East-West Tie's key credit metrics for 2024 were in line with Morningstar DBRS' expectations and remains supportive of the A (low) ratings. We note that leverage increased in 2024 following a $73 million debt issuance to fund the debt portion of the addition to the rate base. East-West Tie is expected to maintain its debt-to-capital ratio at 60%, in line with the regulatory capital structure, through principal repayments on the Notes and by managing its distribution payouts. Additionally, capital expenditure for the Company should be minimal over the near term as the transmission line is newly constructed. Over the medium term, Morningstar DBRS expects East-West Tie's debt-to-capital and EBIT-interest coverage ratios to commensurate with the "A" rating category, offset by a weaker cash flow-to-debt ratio of 8% to 9% because of lower annual depreciation leading to weaker operating cash flows.

CREDIT RATING RATIONALE
East-West Tie's credit ratings are supported by its low business risk and the supportive regulatory environment. This is partly offset by its refinancing risk, weaker cash flow-to-debt metric, limited access to equity markets, and reliance on a single transmission line for its revenues and cash flows.

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) https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

A) Weighting of BRA Factors
In the analysis of East-West Tie, the BRA factors are considered in the order of importance contemplated in the methodology.

B) Weighting of FRA Factors
In the analysis of East-West Tie, the FRA factors are considered in the order of importance contemplated in the methodology.

C) Weighting of the BRA and the FRA
In the analysis of East-West Tie, 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 (November 25, 2024)
https://dbrs.morningstar.com/research/443429

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 03, 2025) https://dbrs.morningstar.com/research/447186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
Morningstar DBRS Criteria: Approach to ESG 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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings .

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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