DBRS Morningstar Assigns Provisional Ratings of A (low) with Stable Trends to East-West Tie Limited Partnership

DBRS Limited (DBRS Morningstar) assigned a provisional Issuer Rating of A (low) to East-West Tie Limited Partnership (East-West Tie or the Company) and assigned a provisional rating of A (low) to East-West Tie's proposed $427 million Senior Secured Debt issuance. The trends on both ratings are Stable. The ratings on East-West Tie are based on the Company's regulated electricity transmission operations in the Province of Ontario (rated AA (low) with a Stable trend by DBRS Morningstar), which contribute 100% of its earnings, offset by a weaker financial risk assessment. The Stable trends reflect East-West Tie's steady stream of earnings and cash flows.

East-West Tie's assets consist of a 445-kilometre transmission line and related assets spanning between Thunder Bay and Wawa, Ontario. The transmission line was completed on March 31, 2022. In June 2021, the Ontario Energy Board approved the Company's 2022 to 2027 revenue requirement application. Under the Custom Incentive Rate-setting (IR) framework, East-West Tie's 2022 revenue was determined under a cost-of-service methodology, whereby the Company can recover all prudent expenditures and have the opportunity to earn a reasonable return on its investments (return on equity of 8.34%). East-West Tie's revenue requirements for subsequent years during the Custom IR term will escalate annually by a revenue cap index based on an inflation factor less a stretch factor. As such, DBRS Morningstar expects the Company's earnings and cash flows over the Custom IR term to be very predictable and stable.

DBRS Morningstar notes that East-West Tie intends to issue $427 million of Senior Secured Amortizing Notes (the Notes), with the proceeds to be used to pay transaction costs and distributed to the owners to reimburse a portion of the development and construction costs. The Notes will amortize according to a 30-year mortgage-style schedule with a balloon payment (65% of the original issuance amount) at maturity in order for the Company to maintain leverage in line with the regulatory capital structure of 60% debt. DBRS Morningstar also expects East-West Tie's cash flow-to-debt metric in 2023 to be modestly weaker as the Company will be recovering interest expense at a placeholder rate until it is trued-up in 2024 through a debt rate deferral account. Over the medium term, DBRS Morningstar expects East-West Tie's debt-to-capital and EBIT-interest coverage ratios to be in line 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. A positive rating action may occur if the Company improves its cash flow-to-debt ratio to the "A" rating category for a sustained period. A negative rating action could occur if East-West Tie's overall financial risk assessment is no longer commensurate with the assigned ratings.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology applicable to the ratings is Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 13, 2022; https://www.dbrsmorningstar.com/research/402616).

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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