DBRS Morningstar Confirms Ratings of Hydro One Limited at "A," Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Hydro One Limited (HOL or HoldCo) at "A" with Stable trends. The ratings of HOL are based on its wholly owned subsidiary, Hydro One Inc. (HOI or the Utility; rated A (high) with a Stable trend by DBRS Morningstar), which provides 99% of HoldCo's earnings and cash flows. The one-notch ratings differential between HOL and HOI reflects structural subordination of debt at HoldCo to the Utility. The confirmation reflects the stability of the distributions from HOI to HOL and the low nonconsolidated leverage at HoldCo (6.9% as at December 31, 2021).

HOL's business risk assessment is largely based on the stability provided by the Utility's regulated distribution and transmission business under the Ontario Energy Board. In August 2021, HOI filed its first Joint Rate Application (JRAP) for approval of its 2023 to 2027 transmission revenue requirement and distribution rates. The application is largely a continuation of the previous approvals under the Custom Incentive Rate-making framework whereby the revenues requirements are determined under cost-of-service for the first year with subsequent annual increases calculated by a revenue cap index based on inflation, productivity, stretch, and capital factors. DBRS Morningstar notes that, once approved, the JRAP will provide stability for HOL and HOI as well as certainty of funding for its large capital expenditures (capex) program ($7.6 billion for its transmission business and $5.6 billion for its distribution business over the five-year term). A decision is expected by the end of 2022.

Debt at HOL currently consists of $425 million of Senior Unsecured Debentures maturing in October 2027 and a $250 million revolving credit facility (undrawn as at December 31, 2021). Leverage at HoldCo has remained low at 6.9% in 2021, and is expected to remain below 10% over the medium term. DBRS Morningstar continues to expect distributions to HOL from HOI to be sufficient for HoldCo’s dividend requirements and interest payments. As the ratings at HOL are based on the credit quality of HOI, HoldCo’s ratings will move in lockstep with the Utility’s ratings. A positive rating action is unlikely given HOI’s current business and financial risk profiles and its substantial capex program. A negative rating action could occur if, on a sustained basis, the Utility’s cash flow-to-debt and debt-to-capital ratios weaken below the “A” rating category (respectively, below 12.5% and above 60.0% (13.8% and 55.9%, respectively, as at December 31, 2021)) or nonconsolidated leverage at HoldCo exceeds the 20% threshold for a sustained period.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 24, 2021; https://www.dbrsmorningstar.com/research/384922), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

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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