DBRS Morningstar Confirms Rating on Independent Electricity System Operator at A (high) With a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed its Issuer Rating on 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.

The IESO was not materially affected by the Coronavirus Disease (COVID-19) pandemic in 2020 and was able to continue to operate effectively with coronavirus restrictions in place. DBRS Morningstar notes that as the pandemic continues in Ontario the IESO remains exposed to increased uncertainty from potential customer defaults to local distribution companies (LDCs), which in turn could lead to LDCs being unable to pay the IESO for electricity purposes. DBRS Morningstar notes that the IESO did not have any defaults from LDCs in 2020 but there remains uncertainty if electricity consumer defaults will place pressure on LDCs and their payments to the IESO in 2021.

Any potential defaults from LDCs would be processed by the IESO, in the following order, (1) drawing on its Ontario Financing Authority (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. Any defaults could pressure the IESO's financial position in the short term, although 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 high 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.

ESG CONSIDERATIONS
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: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344), 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.

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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