Morningstar DBRS Confirms Credit Ratings of Milton Hydro Holdings Inc. at A (low) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Milton Hydro Holding Inc's (MHHI or the Company) Issuer Rating and Senior Unsecured Debentures credit rating at A (low). All trends are Stable. The Stable trends reflect Morningstar DBRS' expectation that MHHI's credit profile will remain consistent over the medium term, supported by stable regulated cash flows, a reasonable regulatory framework, and strong financial metrics despite its small operational scale.

KEY CREDIT RATING CONSIDERATIONS
The ratings reflect MHHI's ownership of Milton Hydro Distribution Inc. (MHDI), which provides 95% of the Company's earnings through regulated electricity distributions. MHDI is a local distribution company regulated by the Ontario Energy Board (OEB) and provides predictable earnings and cash flows. The ratings continue to remain constrained by MHDI's small rate base (approximately $112.3 million, as approved in 2023 rebasing) and customer base (approximately 45,000). MHDI's Distribution System Plan (DSP) outlines increased capital expenditure (capex) for asset renewal, reliability, and new connections, supporting long-term stability but potentially pressuring metrics if not fully recovered.

MHHI issued Senior Unsecured Debentures in September 2024, and the transaction was debt neutral, with proceeds used to refinance existing debt at MHDI. Additionally, debt at the Company's unregulated subsidiary, Milton Energy and Generation Solutions Inc. (MEGS), has been minor ($3.8 million as at December 31, 2024; approximately 6% of consolidated debt). The Company does not intend to issue further debt at its subsidiaries. As such, Morningstar DRBS views MHHI as a consolidated entity with no credit rating impact from structural subordination.

The OEB's regulatory framework continues to remain reasonable, allowing recovery of prudent expenditures and a deemed return on equity (ROE) of 8.66% (fixed through 2027).

CREDIT RATING DRIVERS
Morningstar DBRS considers a positive credit rating action to be unlikely given the size of MHHI. A positive credit rating action would require a material improvement in business risk assessment. A negative credit rating action could occur if the Company's key credit metrics fell to a level no longer in line with the "A" rating category for a sustained period (i.e., cash flow-to-debt below 14%).

EARNINGS OUTLOOK
MHHI's earnings remain stable, underpinned by MHDI's regulated operations, even though earnings in 2020¿22 were weak because of the impact of the COVID-19 pandemic and because MHDI deferred rebasing in 2021 and 2022 because of changes to its senior leadership team. However, following rebasing in 2023, the Company's earnings have now returned to historical levels. Additionally, Morningstar DBRS notes that, except for the 2019¿22 period, MHDI's achieved regulated ROE has generally been in line with the allowed ROE. Given the stability of the regulated business, Morningstar DBRS expects the Company's earnings to be stable over the medium term, supported by the Price Cap Incentive Rate-setting (Price Cap IR) mechanism and modest growth in the customer base. For 2025, the OEB approved a 3.6% distribution rate increase effective January 1, 2025, tied to inflation (with 0% productivity and stretch factors), which should support revenue stability.

FINANCIAL OUTLOOK
MHHI's key credit metrics have also been in line with the "A" rating category. While the Company's cash flow-to-debt ratio was weak in 2019¿22 because of the lower earnings during this period, this has been offset by the stronger EBIT-interest coverage ratio and leverage that were maintained in line with the regulatory capital structure of 60%. Morningstar DBRS notes that leverage also significantly decreased in 2022 as MHHI used part of the proceeds from the sale of land to pay down debt. Following rebasing in 2023, the Company's cash flow-to-debt metric recovered to a level consistent with the "A" rating category. Morningstar DBRS expects future cash flows to be stable, reflecting the regulated nature of MHHI's operations. Additionally, the Company's dividend policy is reasonable (40% of the previous year's net income) and capex are not expected to be significant (in the range of $10 million to $12 million for the next four years), which should help stabilize key credit metrics.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): BBBH
MHHI's CBRA of BBBH is primarily supported by the stability of MHDI's regulated electricity distribution operations with supportive OEB framework. However, the CBRA is constrained by MHDI's small scale, which limits MHHI's diversification and scale advantages. As a result, the business risk score also factors in a negative 1 notch adjustment for small size.

Comprehensive Financial Risk Assessment (CFRA): AH
MHHI's CFRA of AH reflects its strong key credit metrics supported by its stable cash flow from operations following the rebasing. Morningstar DBRS expects MHHI's key credit metrics to remain strong and its capital structure to remain solid over the near and medium term.

Intrinsic Assessment (IA): AL
The IA midpoint of "AL" is within the Intrinsic Assessment Range; it is based on the CBRA and CFRA and takes into consideration current credit rating trend and peer comparisons, among other factors.

Additional Considerations: None
MHHI's credit ratings include no further negative or positive adjustments because of additional considerations.

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 at (May 16, 2025), https://dbrs.morningstar.com/research/454196.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/460709.

Morningstar DBRS notes that this Press Release was updated on August 15, 2025 to include the IA Framework disclosure and link as well as to remove the BRA/FRA disclosures.

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/Nonregulated Utility and Independent Power Producer Industries (July 21, 2025), https://dbrs.morningstar.com/research/459142

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 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 methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025), https://dbrs.morningstar.com/research/454196

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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