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

DBRS Limited (DBRS Morningstar) confirmed Hydro One Limited's (HOL or HoldCo) Issuer Rating and Senior Unsecured Debentures credit rating at "A" with Stable trends. The credit 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 credit ratings differential between HOL and HOI reflects structural subordination of debt at HoldCo to the Utility. The Stable trends reflect HOL's financial risk assessment, with all key credit metrics in line with the "A" rating category.

In November 2022, the Ontario Energy Board approved HOI's first Joint Rate Application for 2023 to 2027 transmission revenue requirement and distribution rates. The approved settlement agreement, which was largely based on a continuation of the previous Custom Incentive Rate-making framework, provides the Utility with certainty of funding for its substantial capital expenditures (capex) program over the next five years. DBRS Morningstar notes that the province has since directed HOI to develop additional transmission projects, such as the $1.2 billion Waasigan Transmission Line. As such, annual capex over the next five years is expected to average over $2.7 billion, up from $2.1 billion in 2022.

While HOL's financial risk assessment remains reasonable, HoldCo's key credit metrics may see pressure over the next few years because of the large capex spend at HOI. DBRS Morningstar expects the Utility to manage its capex and dividend requirements through a prudent mix of debt issuances and operating cash flows in order to maintain leverage in line with the regulatory capital structure and other key ratios within the "A" credit rating category. Additionally, debt at HOL currently consists of $425 million of Senior Unsecured Debentures maturing in October 2027. DBRS Morningstar continues to expect distributions to HOL from HOI to be sufficient for HoldCo's dividend requirements and interest payments. As HOI is effectively the only source of cash flow for HOL, HoldCo’s credit ratings will move in lockstep with the Utility’s credit ratings. A negative credit rating action may also occur should debt at HOL increase materially so that key metrics weaken to a level that no longer supports the current credit ratings (i.e. debt-to-capital above 65% and cash flow-to-debt materially below the 12.5% threshold for a sustained period).

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 27, 2023; https://www.dbrsmorningstar.com/research/421106/global-methodology-for-rating-companies-in-the-regulated-electric-natural-gas-and-water-utilities-industry).

The following methodology has also been applied:
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (September 27, 2023; https://www.dbrsmorningstar.com/research/421119/dbrs-morningstar-global-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships).

The credit 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.

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 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.

DBRS Morningstar 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.

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 credit ratings are under regular surveillance.

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

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