DBRS Morningstar Confirms Ratings of Hydro One Inc. at A (high)/R-1 (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Hydro One Inc. (HOI or the Company) at A (high) and the Commercial Paper rating at R-1 (low). All trends are Stable. The ratings are based on the stability of HOI's regulated transmission and distribution businesses which operate under reasonable regulation by the Ontario Energy Board (OEB).

HOI's business risk assessment has remained steady. In April 2020, the OEB approved the Company's first transmission Custom Incentive Rate-setting (IR) application for 2020 to 2022. Like the 2018 to 2022 distribution Custom IR decision, revenues were set using cost-of-service for the first year, then escalating annually by inflation, capital, productivity, and stretch factors for the remaining term. DBRS Morningstar notes the Custom IR decisions will provide further stability for HOI as well as certainty of funding for its large capital expenditures program (around $2 billion annually).

In July 2020, the Ontario Divisional Court set aside the OEB's decision on the treatment of HOI's deferred tax asset. The court found that the OEB’s decision was incorrect in law that the deferred tax asset should be shared with ratepayers; the court agreed with the Company that it should be allocated entirely to shareholders. In April 2021, the OEB approved a refund of misallocated future tax savings of $257 million from ratepayers to shareholders over a two-year period beginning July 1, 2021. Additionally, DBRS Morningstar expects the deferred tax asset treatment to increase the Company's cash flows by $50 million to $60 million annually and lead to a modest improvement in its key credit metrics.

HOI's key credit metrics remained supportive of the A (high) rating, although the cash flow-to-debt ratio did weaken for the year because of the timing of a $1.2 billion notes issuance in October 2020. The Company was largely able to mitigate the impact from the Coronavirus Disease (COVID-19) pandemic through cost control and efficiency gains throughout the year. DBRS Morningstar will continue to monitor any impact the pandemic has on HOI's operations and financial results. DBRS Morningstar considers a positive rating action to be unlikely given the Company's key credit metrics and the current regulatory framework, as well as uncertainty with the ongoing coronavirus pandemic. A negative rating action may occur if HOI's key credit metrics weaken to a level no longer commensurate with the current rating category for a sustained period, such as if the cash flow-to-debt ratio falls below 12.5% and the debt-to-capital ratio increases above 60%.

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 methodologies are Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (October 27, 2020, https://www.dbrsmorningstar.com/research/368939) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021, https://www.dbrsmorningstar.com/research/375001), 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).

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.

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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