DBRS Morningstar Confirms Independent Electricity System Operator at A (high) with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of the Independent Electricity System Operator (IESO) at A (high) with a Stable trend. The rating is based on (1) the implicit support provided by the Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS Morningstar), (2) the comprehensive legislative framework, and (3) the reasonable regulatory regime for the IESO under which it can recover all its operating costs. The IESO also maintains sufficient liquidity in the form of credit facilities to meet its objectives.

In 2019, the Province passed Bill 87, Fixing the Hydro Mess Act, 2019, which included unwinding the Fair Hydro Plan and replacing it with an on-bill rebate directly on customers' bills. The unwinding of the Fair Hydro Plan resulted in the termination of the Province's $2.0 billion credit facility with the IESO as the facility was no longer required for the program. In December 2019, the IESO increased its credit facility with the Province's agent, the Ontario Financing Authority (OFA), to $1.1 billion from $475 million. The IESO also has a credit facility with the Province's agent, the Ontario Electricity Financial Corporation (rated AA (low) with a Stable trend by DBRS Morningstar), for $160 million and a note payable of $120 million, both maturing on June 30, 2020. Both are expected to be extended in Q2 2020.

In 2019, the Province also directed the IESO to deliver energy-efficiency programs under an interim framework that were previously delivered by local distribution companies (LDCs). This is not expected to have a material impact on the credit quality of the IESO as the funds will be fully recovered through the Global Adjustment Mechanism.

DBRS Morningstar notes that during the Coronavirus Disease (COVID-19) pandemic, the IESO is exposed to increased uncertainty because the Province has mandated that, through July 31, 2020, Ontario residential electricity customers cannot be disconnected for failing to pay their bills. This mandate could potentially lead to an increase in customer defaults to LDCs that could, in turn, potentially lead to LDCs being unable to fully pay the IESO for electricity purchases. Any potential defaults from LDCs would be processed by the IESO in the following order by (1) drawing on its OFA credit facility, (2) seeking repayment from defaulting LDCs, (3) using any collateral provided by LDCs, and, finally, (4) for any potential unrecoverable bad debt, issuing default levies that are apportioned to all remaining non-defaulting market participants. This process could negatively affect the IESO's financial position in the short term. This risk is largely mitigated by the IESO's strong liquidity position, which includes its $1 billion undrawn credit facility with the Province.

DBRS Morningstar does not believe that a positive rating action for the IESO is likely in the near term. However, DBRS Morningstar may take a negative rating action if the coronavirus pandemic results in higher-than-expected payment defaults and, without additional liquidity support from the Province, the IESO's liquidity position becomes strained. DBRS Morningstar may also take a negative rating action if there are unfavourable legislative or regulatory changes that hinder the IESO’s ability to fully pass on costs to market participants.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 7, 2019) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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