20180126Avista to Staff_DR_118(H1) Attachment A.PDF

Corporate Finance: Utilities & Independent Power April 13, 2017
Rating Report
Hydro One Inc.
Debt Rating Rating Action Trend
Issuer Rating A (high)Confirmed Stable
Senior Unsecured Debentures A (high)Confirmed Stable
Commercial Paper R-1 (low)Confirmed Stable
Ratings
Rating Update
On April 7, 2017, DBRS Limited (DBRS) confirmed the Issuer
Rating and the 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 rating confir-
mations reflect the Company’s relatively low risk business pro-
file supported by a transparent regulatory framework, a strong
franchise in electric power transmission and distribution ser-
vices and a reasonable financial profile sustained by predictable
earnings and cash flow. The Stable trend assumes that the qual-
ity of the regulatory regime will continue to remain supportive,
allowing the Company to earn a fair rate of return while recov-
ering costs on a timely basis. DBRS rates HOI as a stand-alone
entity and does not assume any credit support from its owner,
Hydro One Limited (HOL), which is approximately 70% owned
by the Province of Ontario (the Province; rated AA (low) with a
Stable trend by DBRS).
The Company’s transmission business (approximately 61% of
2016 EBIT) owns and operates approximately 98% of the trans-
mission network in the Province while the distribution business
(approximately 39% of 2016 EBIT) serves nearly 26% of the
Province’s customers. HOI’s transmission (for 2015–2016) and
distribution (for 2015–2017) businesses currently operate under
a cost-of-service (COS) model. HOI filed a COS transmission rate
application for 2017–2018 in May 2016 with the Ontario Energy
Board (OEB) and an approval is expected in Q2 2017. HOI’s next
transmission rate application for the period 2019–2023 is ex-
pected to be filed under a Custom Incentive Rate-Setting (CIR)
approach. The Company also filed its CIR distribution rate ap-
plication with the OEB in March 2017 for the 2018–2022 term re-
questing a 2018 revenue requirement increase of 3.5% over 2017.
DBRS views the CIR model as suitable for HOI, as it provides
greater clarity with respect to the Company’s ability to recover
high and variable capital expenditure (capex) requirements.
However, utilities are required to operate under the CIR frame-
work for a longer period (five years), which modestly increases
forecasting risk and regulatory lag.
HOI’s capex program is expected to be approximately $9.75 billion
in the 2017–2021 term (transmission: $6.2 billion; distribution:
$3.55 billion) largely to replace and upgrade aging infrastructure.
HOI’s dividend payout ratio is expected to remain high in order
to meet HOL’s dividend objectives to pay out approximately
70% to 80% of its consolidated net income. DBRS expects HOI’s
credit metrics to be pressured in the medium term because of the
high capex (averaging approximately $2.0 billion annually) and
dividends resulting in free cash flow deficits, which are likely
to be funded with incremental debt. However, the incremental
cash flows are expected to ease the pressure on metrics as proj-
ects are placed in service and added to rate base. HOI’s ratings
could be impacted should its cash flow-to-debt ratio weaken
below 13% and its DBRS adjusted debt-to-capital exceeds 60%
HOI is the largest electricity transmission and distribution company in Ontario. The Company owns and operates over 30,000
circuit kilometres of high-voltage transmission lines and approximately 123,000 circuit kilometres of primary low-voltage
distribution lines.
Issuer Description
Financial Information
Hydro One Inc.For the year ended December 31
(CAD$ millions where applicable)2016 2015 2014 2013 2012
Cash flow/Total debt 13.6%13.3%15.5%15.3%15.4%
Total debt in capital structure 1 53.0%51.1%53.0%55.2%55.6%
Total debt in capital structure 1, 2 57.3%55.5%53.0%55.2%55.6%
EBIT gross interest coverage (times) 1 2.77 2.74 2.83 2.94 2.89
1 Includes operating leases. 2 DBRS adjusted, excludes deferred tax assets related to departure tax.
Tom Li
[phone] [e-mail]
Ram Vadali, CFA, CPA
[phone] [e-mail]
Jay Gu [phone] [e-mail]
Continued on P.2
Staff_DR_118(H1) Attachment A Page 1 of 10
Corporate Finance: Utilities & Independent Power April 13, 2017
Rating Report | Hydro One Inc. DBRS.COM 2
Rating Updates (CONTINUED)
Rating Considerations
Strengths
1. Reasonable regulatory environment
HOI’s earnings are contributed by its low-risk regulated trans-
mission and distribution businesses, which operate under
a reasonable regulatory framework. The OEB rate approval
framework permits HOI a reasonable opportunity to recover op-
erating and capital costs and earn the approved rates of return.
The Company’s deemed capital structure (debt-to-equity of
60%:40%) has remained unchanged for several years. DBRS views
the utility regulatory framework in Ontario as transparent and
supportive for regulated transmission and distribution operators.

2. Extensive franchise area
HOI owns the largest transmission and distribution businesses
in Ontario. The Company operates approximately 98% of the
Province’s transmission capacity based on revenues approved by
the OEB, is connected to more than 44 local distribution compa-
nies (including HOI’s own distribution business) and 87 directly
connected industrial customers and serves approximately five
million customers. The Company’s transmission system is also
interconnected to systems in Manitoba, Michigan, Minnesota,
New York and Québec through the use of interties. Load growth
is expected to be modest and in line with economic growth in the
Province. The distribution business spans approximately 75% of
the Province, serving over 1.35 million customers, or approxi-
mately 26% of the total customers in Ontario.
3. Reasonable financial profile
HOI continues to maintain a reasonably healthy balance sheet.
Although credit metrics have been pressured in recent years, they
have remained reasonable for the current rating category (DBRS-
adjusted debt-to-capital ratio at 57.3%, EBIT interest coverage at
2.8 times (x) and cash flow-to-debt at 13.6% for 2016).
Challenges
1. High level of planned capex
The Company is currently in the midst of an aggressive build-
out program that will continue over the next several years and
pressure credit metrics. Capex was approximately $1.7 billion
for 2016 (approximately $988 million for transmission and
approximately $703 million for distribution), with a plan for
approximately $9.75 billion in the next five years based on HOI’s
current regulatory filings.
2. High dividend payouts
Compared with pre-2015 levels, DBRS expects the Company
to pay out a higher portion of its earnings as dividends to sup-
port HOL’s dividend policy (payout approximately 70% to 80%
of consolidated net income). DBRS expects the Company’s
dividend payout ratio to remain high in order to meet HOL’s
dividend objectives, and consequently, HOI will need to access
significant external funding to finance the potentially sizable
free cash flow deficits because of the dividends and capex com-
mitments expected over the medium term.
3. Earnings sensitive to volume and costs
Earnings and cash flows for electricity distribution compa-
nies are partially dependent on the volume of electricity sold.
Weather patterns, seasonality and economic conditions direct-
ly affect the volume of electricity sold and, therefore, earnings.
The OEB approves the Company’s transmission and distribution
rates based on projected electricity load and consumption levels.
If actual load or consumption materially falls below projected
levels, earnings of these businesses could be adversely affected.
Furthermore, current revenue requirements are approved based
on cost assumptions that could materially differ from actual costs.
There is no assurance that the OEB would allow rate increases
sufficient to offset unfavourable financial impacts from unantici-
pated changes in electricity demand or in costs. However, this
risk is expected to be gradually mitigated as the OEB implement-
ed the new distribution rate design for all local distribution com-
panies beginning in 2016 and HOI is allowed to phase in a higher
fixed monthly rate and lower volumetric rate for its residential
customers over the next eight years. Consequently, by 2023, all
residential customers will be charged a fully fixed monthly fee
for distribution services.
on a sustained basis. DBRS expects any potential acquisitions of
unregulated businesses to be carried out at the HOL level. DBRS
also notes that acquisitions by HOI of regulated utility assets in
less supportive regulatory regimes or acquisition of regulated
assets with some exposure to unregulated operations could
weaken the business profile of the Company and have an impact
on ratings.
Staff_DR_118(H1) Attachment A Page 2 of 10
Corporate Finance: Utilities & Independent Power April 13, 2017
Rating Report | Hydro One Inc. DBRS.COM 3
Earnings and Outlook
2016 Summary
• HOI’s earnings are relatively stable and are supported by a rea-
sonable regulatory environment, extensive franchise area and
a diverse customer base that is growing at a steady rate.
• The Company’s net earnings were slightly higher in 2016, com-
pared with 2015, resulting from higher transmission rates and
higher peak demand as a result of warmer weather and mod-
estly lower OM&A expense. This was partly offset by higher
financial costs caused by higher debt.
2017 Outlook
• Earnings before interest and tax (EBIT) for 2017 are expected
to be slightly lower as the impact of the lower allowed ROE
approved by the OEB (8.78% in 2017, versus 9.19% in 2016) for
both the transmission and distribution segments is expected to
be largely offset by the higher rate base.
Hydro One Inc.For the year ended December 31
(CAD millions where applicable)2016 2015 2014 2013 2012
Net Revenue 3,075 3,079 3,129 3,054 2,954
EBITDA 2,016 1,949 1,985 1,905 1,883
EBIT 1,247 1,192 1,263 1,229 1,224
Gross interest expense 448 433 444 416 421
Earning before taxes 855 814 874 858 854
Income taxes (131)(113)(86)(106)(118)
Minority interest (6)(10)2 0 0
Net income before non-recurring items 718 691 790 752 736
Non-recurring items 1 12 1 (41)51 9
Reported net income 730 692 749 803 745
Return on equity 9.7%9.0%10.3%10.6%11.1%
1 DBRS adjustment of $48 million for customer service recovery project costs in 2014 and $43 million property tax recovery in 2013.
2016 2015 2014 2013 2012
Transmission rate base (CAD billions)10.78 10.17 9.93 9.35 8.80
Distribution rate base (CAD billions)7.06 6.59 5.03 5.03 5.03
Allowed ROE - Transmission 9.19%9.30%9.36%8.93%9.42%
Allowed ROE - Distribution 9.19%9.30%9.66%9.66%9.66%
Deemed Equity (Transmission & Distribution) 40%40%40%40%40%
Staff_DR_118(H1) Attachment A Page 3 of 10
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Rating Report | Hydro One Inc. DBRS.COM 4
Financial Profile
2016 Summary
• Overall, HOI’s key credit metrics remained in line with the
current rating category.
• Operating cash flow was higher because of the higher rate base
and lower OM&A costs, however the Company’s capex pro-
gram and dividends to HOL resulted in free cash flow deficits
that were largely funded with debt.
• HOI made capital investments of approximately $1.7 billion
and placed $1.6 billion of new assets in-service in 2016.
• The debt-to-capital ratio weakened slightly, largely as a result
of higher debt for the year that was used to fund the Company’s
capital program and for the acquisition of Hydro One Sault Ste.
Marie LP (formerly Great Lakes Power Transmission LP) in
October 2016. HOI paid a departure tax resulting from the
transition from the Payment in Lieu of Taxes Regime to the
Federal Tax Regime in 2015. HOI expects that this will result
in annual net cash savings over at least the next five years be-
cause of the reduction of cash income taxes payable. The bal-
ance in the deferred tax asset of $1.6 billion is expected to act
as a tax shield for HOI’s future tax liabilities, reducing cash
taxes payable by the Company. However, the Canada Revenue
Agency may revisit the tax treatment of these assets and make
adjustments to HOI’s tax liability. There is also a risk that, in
current or future rate applications, the OEB will reduce HOI’s
revenue requirement by the net cash savings, which could
have a material impact on the Company. DBRS has therefore
removed the balance of this asset from HOI’s equity in calcu-
lating the debt-to-capital ratio.
Hydro One Inc.For the year ended December 31
(CAD$ millions where applicable)2016 2015 2014 2013 2012
Net income before non-recurring items 718 691 790 752 736
Depreciation & amortization 679 667 641 597 589
Deferred income taxes and other 119 (3)(51)41 (12)
Cash flow from operations 1,516 1,355 1,380 1,390 1,313
Dividends paid *(611)(888)(287)(218)(370)
Capital expenditures (1,634)(1,569)(1,504)(1,387)(1,454)
Free cash flow (bef. working cap. changes)(729)(1,102)(411)(215)(511)
Changes in non-cash work. cap. items 168 187 (55)11 (40)
Changes in regulatory assets (16)(3)(69)3 12
Deferred income tax asset 1 0 (2,798)0 0 0
Net Free Cash Flow (577)(3,716)(535)(201)(539)
Acquisitions (224)(143)(66)0 0
Short-term investments 0 0 0 0 0
Long-term investments 2 0 0 250 0 0
Amount to be financed (801)(3,859)(351)(201)(539)
Net equity change 0 2,600 72 0 0
Net debt change 776 1,254 (177)574 488
Other (16)(6)(9)(3)18
Change in cash (41)(11)(465)370 (33)
Total debt 11,149 10,198 8,927 9,088 8,521
Cash and equivalents 48 89 100 565 195
Cash flow-to-total debt 13.6%13.3%15.5%15.3%15.4%
Total debt in capital structure 3 53.0%51.1%53.0%55.2%55.6%
Total debt in capital structure 4 57.3%55.5%53.0%55.2%55.6%
EBIT gross interest coverage (times)2.78 2.75 2.84 2.95 2.91
Debt-to-rate base 62.5%60.8%59.7%63.2%61.6%
Dividend payout ratio 5 85.1%128.6%36.3%29.0%50.3%
* Dividend in 2016 includes $609 million return of stated capital to HOL.1 Impact of deferred income tax asset that resulted as a consequence of leaving the PILs Regime and entering the Federal Tax Regime. 2 Proceeds of $250 million Province of Ontario FRNs redeemed in 2014. 3 Includes operating leases. 4 Excludes deferred income tax assets. 5 2015 dividends includes dividends paid for recapitalization; 2016 dividends include approximately $77 million in dividends pertaining to 2015.
Staff_DR_118(H1) Attachment A Page 4 of 10
Corporate Finance: Utilities & Independent Power April 13, 2017
Rating Report | Hydro One Inc. DBRS.COM 5
Debt and Liquidity
Financial Profile (CONTINUED)
• HOI has adequate access to capital markets. In 2016, the
Company issued an aggregate amount of $2.3 billion under the
medium-term note program to repay its maturing long-term
and term out its short-term debt, as well as for other general
corporate purposes.
• HOI’s long-term debt and credit facilities covenants limit the
permissible debt to 75% of its total capitalization and limit the
ability to sell assets and impose negative pledge provisions,
subject to customary exceptions. As at December 31, 2016,
the Company was in compliance with all of these covenants
and limitations.
• HOI’s refinancing risk remains manageable because maturi-
ties are well spread-out.
• The Company’s liquidity profile remains reasonable and is ad-
equate for its normal operating requirements.
• In August 2016, HOI terminated two credit facilities and entered
into a new credit agreement for $2.3 billion revolving credit
facility maturing in June 2021. The Company’s $1.5 billion
commercial paper program is backstopped by this committed
revolving credit facility. As of December 31, 2016, approxi-
mately $469 million of commercial paper was outstanding.
Credit Facilities and Long-Term Debt
(CAD millions - As at December 31, 2016)Amount Draw/LOCs Available Maturity
Cash & Cash Equivalents 48 48
Revolving standby credit facility 2,300 469 1,831 June 2021
Total 2,348 469 1,879
Long-term Debt Maturities
(CAD millions - As at December 31, 2016)2017 2018 2019 2020 2021 Thereafter Total
Principal Repayments 602 753 731 653 503 7,429 10,671
% of Total 6% 7% 7% 6% 5%70% 100%
Major Projects and Acquisitions
• Major transmission development projects include: (1) the
$87 million Guelph Area Transmission Refurbishment Project,
an upgrade of a transmission line and transmission stations in
south-central Guelph, major portions were placed in-service
in September 2016; (2) the $118 million Toronto Midtown
Transmission Reinforcement Project, a new transmission line
in midtown Toronto and the refurbishment of an underground
cable, a major portion has been put in-service in December 2016;
(3) the $267 million Clarington Transmission Station Project
to install additional autotransformer capacity in the east
Greater Toronto Area, expected to be in service in 2018; (4) the
$73 million Supply to Essex County Transmission
Reinforcement Project, a new transmission line in the
Windsor-Essex region, expected to be in service by 2018;
2017 Outlook
• DBRS expects free cash flow deficits to continue in the me-
dium term as the Company plans to incur high capex averag-
ing approximately $2.0 billion annually for the 2017–2021 term
(approximately 64% for transmission and 36% for distribution)
largely to sustain HOI’s aging power systems and also to build
critical infrastructure to meet growth in the customer base.
• DBRS expects the Company to support HOL’s dividend policy
(annual dividends of approximately 70% to 80% of consoli-
dated net income) to the extent that such dividend payouts
maintain HOI’s regulatory capital structure. Consequently,
DBRS expects the Company to pay a higher portion of its earn-
ings as dividends compared with pre-2015 levels.
• Cash flow from operations is expected to grow over the medi-
um to long term as capital projects are placed into service and
included in the rate base. As a result, DBRS expects key credit
metrics to gradually improve and continue to remain reason-
able for the current rating.
Staff_DR_118(H1) Attachment A Page 5 of 10
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Rating Report | Hydro One Inc. DBRS.COM 6
Simplified Ownership Structure (as at December 31, 2016)
• In November 2015, HOL and the Province completed an ini-
tial public offering on the Toronto Stock Exchange of approxi-
mately 89.3 million common shares of HOL. In April 2016, the
Province completed a secondary offering of 83.3 million com-
mon shares of HOL.
• HOI is 100% owned by HOL, which is in turn owned
70.1% by the Province and the remaining percentage by
public shareholders.
• HOI is a regulated utility that owns Hydro One Networks Inc.
and Hydro One Remote Communities Inc.
• Hydro One Networks Inc. carries on rate-regulated transmis-
sion and distribution businesses.
• Hydro One Remote Communities, Inc. generates and supplies
electricity to remote communities in northern Ontario.
Province1
AA (low)R-1 (middle)
Public Shareholders
Hydro One Limited
Hydro One Inc.
A (high); Stable
R1(low); Stable
Hydro One
Networks Inc.
Hydro One Remote
Communities Inc.
CommonsharesCommon shares and Series 1 preferred shares
Public Debt
Rate-Regulated Businesses
100%
100%100%
tes: As of December 31, 2016, the Province owned approximately 70.1% of Hydro One Limited's common shares and 100% of the outstanding Series 1 preferred shares.
Hydro One
Telecom Inc.
Non-Rate-Regulated Businesse
100%
(5) the Northwest Bulk Transmission Line Project, a new
transmission line in the west Thunder Bay area (cost to be
determined); and (6) the $166 million East-West Tie Station
Expansion Project, expected to be in service in 2020.
• In August 2016, HOI reached an agreement to acquire Orillia
Power Distribution Corporation, an electricity distribution
company located in Simcoe County, Ontario, for approximate-
ly $41 million, including the assumption of $15 million in out-
standing indebtedness and regulatory liabilities and subject to
other closing adjustments.
• In October 2016, the Company completed the acquisition of
Hydro One Sault Ste. Marie LP (formerly Great Lakes Power
Transmission LP) for $226 million in cash and the assump-
tion of approximately $150 million in debt. The asset has a rate
base of approximately $218 million in 2017, with 15 transmis-
sion stations and 560 kilometres (km) of high- and medium-
voltage 44-230 kilovolt transmission lines covering a service
area of approximately 12,000 square km. Upon the comple-
tion of the transaction, HOI operates approximately 98% of
Ontario’s transmission capacity.
Major Projects and Acquisitions (CONTINUED)
Staff_DR_118(H1) Attachment A Page 6 of 10
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Rating Report | Hydro One Inc. DBRS.COM 7
Regulation
Regulatory Overview
• HOI has a good track record of prudently managing its reg-
ulatory risk. The Company’s transmission and distribution
businesses are licensed and regulated by the OEB. DBRS has
assessed the regulatory environment to be reasonable. (Refer to
the Assessment of HOI’s Regulatory Environment on page 8.)
• The OEB uses a deemed debt-to-common equity structure
of 60% to 40% for both the transmission and distribution
business segments.
Transmission
• The Company’s transmission business continues to operate
under a COS framework. In January 2015, the OEB approved
HOI’s transmission rates revenue requirement of $1,477 million
for 2015 and the 2016 revenue requirement of $1,516 million,
subject to adjustments for the cost of capital parameters. In
January 2016, the OEB revised the revenue requirement for
2016 to $1,480 million, excluding Bruce to Milton LP transmis-
sion network on an allowed ROE of 9.19%.
• In May 2016, HOI submitted its 2017–2018 transmission rate
application based on the COS model. The application seeks
approval of a revenue requirement of $1,505 million for 2017
and $1,586 million for 2018, reflecting a required rate base
of $10,554 million for 2017 and $11,226 million for 2018. In
December 2016, HOI filed an application to update its revenue
requirement to $1,487 million for 2017 and to $1,558 million for
2018, excluding Bruce to Milton LP (B2M LP) transmission net-
work, based on OEB’s updated 2017 cost of capital parameters.
• In 2015, the OEB initiated a discussion to develop a framework
for the application of the Renewed Regulatory Framework for
Electricity Distributions (RRFE) principles to transmitters. In
February 2016, the OEB issued a new set of filing requirements
with performance-based principles for transmission applica-
tions that will likely apply to HOI’s transmission revenue ap-
plication for 2019–2023.
• In December 2015, the Company updated the revenue require-
ment of the B2M LP transmission network for five years, from
2015 to 2019, with a revenue requirement range of $36 million
to $41 million annually. In January 2016, the OEB issued its
Decision and Rate Order approving the B2M LP revenue re-
quirement recovery through the 2016 Uniform Transmission
Rates. In December 2016, B2M LP’s 2017 revenue requirement
was updated to $34 million, based on an updated 2017 cost of
capital parameters issued by the OEB in October 2016.
• In December 2016, Great Lakes Power filed an application seek-
ing approval of a revenue requirement of $41 million for 2017.
Distribution
• OEB’s RRFE established a rate-setting policy that contains
three performance-based rate-setting methods (PBR): 4th
Generation Incentive Rate-setting (suitable for most dis-
tributors), Custom Incentive Rate-setting (CIR), suitable
for those distributors with large or highly variable capital
requirements and the Annual Incentive Rate-setting Index
(suitable for distributors with limited incremental capital
requirements). Electricity distributors may select the rate-
setting method that best meets their needs and circumstances
and apply to the OEB accordingly.
• Under both COS and PBR, HOI can charge rates that allow it to
recover the costs of providing its services and earn an allowed
ROE. PBR encourages the Company to improve efficiency over
time, resulting in lower costs to provide the same service.
• HOI’s distribution business opted to use the CIR method un-
der the RRFE. In December 2013, the Company filed a five-
year distribution custom rate application (2015–2019) with the
OEB customized to fit HOI’s specific business circumstances,
primarily servicing rural and remote areas of the province and
significant multi-year capital programs. The OEB did not con-
sider the Company’s custom COS application as sufficiently
aligned with its performance-based framework for setting
rates and approved rates for a shorter three-year period (2015–
2017) based on the COS methodology with the allowed ROE to
be updated annually. However, the OEB approved the rate base
and capex for 2015–2017, as applied for by HOI.
• In March 2015, the OEB approved the Company’s distribu-
tion rates revenue requirement of $1,326 million for 2015;
$1,430 million for 2016; and $1,486 million for 2017. In
January 2016, the OEB revised the revenue requirement for
2016 to $1,410 million based on an updated 2016 allowed ROE
of 9.19%. In December 2016, the OEB revised the revenue re-
quirement for 2017 to $1,415 million based on an updated 2017
allowed ROE of 8.78%.
• HOI submitted a distribution application for 2018–2022 rates
based on the CIR approach on March 31, 2017. The application
seeks approval of revenue requirement of $1,505 million for
2018, reflecting an increase of 3.5% over 2017, OEB-approved
levels and a required rate base of $7,672 million in mid-2018. The
revenue requirement for the first year (2018) is determined us-
ing a cost-of-service, forward test year approach. To establish
the annual revenue requirements from 2019 to 2022, HOI has
proposed a Revenue Cap Incentive-Rate, where the Company
is subject to a revenue cap index that allows for an annual in-
crease in distribution rates based on inflation, productivity,
plus a custom capital factor to recover incremental revenue
associated with its capex. Equity thickness at 40% remains un-
changed, and the ROE of 8.78% for 2017 will be adjusted at end
of the year for 2018 based on the OEB’s formulaic approach.
After adjustment for a reduced load forecast (3.0%), the result-
ing average impact on distribution rates is an increase of 6.5%
in 2018, and an average of 3.7% per annum over the term. HOI
would retain the first 100 basis points (bps) of any earnings that
exceed the allowed ROE and will be required to share 50% of
any excess over 100 bps in any year of the term with customers.
Staff_DR_118(H1) Attachment A Page 7 of 10
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Rating Report | Hydro One Inc. DBRS.COM 8
DBRS Assessment of Regulatory Environment
The chart below reflects DBRS’s assessment of the regulatory environment for HOI’s transmission and distribution
business segments.
Criteria Score Analysis
1. Deemed Equity Excellent
Good
Satisfactory
Below Average
Poor
The OEB allows HOI’s transmission and distribution business to have a deemed equity of 40%,
which has been consistent historically.
2. Allowed ROE Excellent
Good
Satisfactory
Below Average
Poor
The cost of capital parameters are updated annually by the OEB. The OEB has set ROE for the
transmission and distribution business at 8.78% for 2017 (9.19% in 2016).
3. Energy Cost Recovery Excellent
Good
Satisfactory
Below Average
Poor
There is no power price risk, as HOI is not responsible for purchasing power from generation
facilities or the wholesale market. Power costs are passed on to ratepayers, and HOI collects
the payments from its customers on a monthly basis.
4. Capital and Operating Cost Recovery Excellent
Good
Satisfactory
Below Average
Poor
Major capital costs are pre-approved by the OEB and added to the rate base after project
completion. In addition, the OEB can approve rate riders to allow for the recovery or disposition
of specific regulatory accounts over specified time frames.
5. COS versus IRM Excellent
Good
Satisfactory
Below Average
Poor
Hydro One’s distribution business has opted to use the five-year CIR option under the RRFE.
However, the distribution business has been allowed to operate under a COS rate-setting
methodology by the OEB until 2017. Transmission rates are based on COS application rate
orders approved by the OEB every two years.
6. Political Interference Excellent
Good
Satisfactory
Below Average
Poor
After years of a relatively stable political and regulatory environment, the utility sector in Ontario
could face growing challenges. As generation costs potentially rise above and ultimately test the
political ceiling (10% increase in the total bill annually), it may be difficult for the utilities to pass
costs onto ratepayers.
7. Stranded Cost Recovery Excellent
Good
Satisfactory
Below Average
Poor
HOI has a limited history of stranded costs. Most prudently incurred or budgeted capex are
approved by the OEB. DBRS notes that there can be some regulatory lag in the approval
of capex.
8. Rate Freeze Excellent
Good
Satisfactory
Below Average
Poor
From 2002 to 2005, because of rising rates during Ontario’s experimental utility deregulation
phase, a distribution rate freeze was imposed. There have been no subsequent province-wide
rate freezes.
Staff_DR_118(H1) Attachment A Page 8 of 10
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Hydro One Inc.
Balance Sheet
(CAD millions)Dec. 31 Dec. 31
Assets 2016 2015 2014 Liabilities & Equity 2016 2015 2014
Cash & equivalents 48 89 100 S.T. borrowings 469 1,491 2
Accounts receivable 833 772 1,016 Accounts payable 828 743 784
Inventories 19 21 23 Current portion L.T.D.602 500 552
Prepaid expenses & other 302 263 311 Other current liab.358 247 377
Total Current Assets 1,202 1,145 1,450 Total Current Liab.2,257 2,981 1,715
Net fixed assets 19,068 17,893 17,401 Long-term debt 10,078 8,207 8,373
Future income tax assets 1,213 1,610 7 Deferred income taxes 60 206 1,313
Goodwill & intangibles 676 499 449 Pension and other liabilities 2,714 2,687 2,999
Regulatory assets 3,145 3,015 3,200 Regulatory liabilities 209 236 168
Investments & others 6 7 43 L.T. Payables & Other L.T. liab.51 27 35
Preferred shares 0 0 323
Minority interest 72 75 70
Common equity 5,391 6,000 3,314
Retained earnings 4,487 3,759 4,249
Accumulated OCI (9)(9)(9)
Total Assets 25,310 24,169 22,550 Total Liab & SE 25,310 24,169 22,550
Balance Sheet &For the year ended December 31
Liquidity & Capital Ratios 2016 2015 2014 2013 2012
Current ratio 0.53 0.38 0.85 1.03 0.73
Cash flow/Total debt 13.6%13.3%15.5%15.3%15.4%
Total debt in capital structure 1 53.0%51.1%53.0%55.2%55.6%
(Cash flow-dividends)/Capex (times)0.55 0.30 0.73 0.84 0.65
Dividend payout ratio 2 85.1%128.6%36.3%29.0%50.3%
Coverage Ratios (times)
EBIT gross interest coverage 2.78 2.75 2.84 2.95 2.91
EBITDA gross interest coverage 4.50 4.50 4.47 4.58 4.47
Fixed-charges coverage 2.77 2.74 2.83 2.94 2.89
Profitability Ratios
EBITDA margin 65.6%63.3%63.4%62.4%63.7%
EBIT margin 40.6%38.7%40.4%40.2%41.4%
Profit margin 23.4%22.4%25.2%24.6%24.9%
Return on equity 9.7%9.0%10.3%10.6%11.1%
Return on capital 5.1%5.1%5.5%5.6%6.0%
1 Including operating leases. 2 2015 dividends includes dividends paid for recapitalization; 2016 dividends include approximately $77 million in dividends pertaining to 2015.
Staff_DR_118(H1) Attachment A Page 9 of 10
Corporate Finance: Utilities & Independent Power April 13, 2017
Rating Report | Hydro One Inc. DBRS.COM 10
Current 2015 2014 2013 2012 2011
Issuer Rating A (high)A (high)A (high)A (high)A (high)A (high)
Senior Unsecured Debentures A (high)A (high)A (high)A (high)A (high)A (high)
Commercial Paper R-1 (low)R-1 (low) R-1 (middle) R-1 (middle) R-1 (middle) R-1 (middle)
• DBRS Confirms Ratings of Hydro One Inc., April 7, 2016.
Rating History
Previous Action
Previous Report
• Hydro One Inc.: Rating Report, April 12, 2016.
Notes:All figures are in Canadian dollars unless otherwise noted.
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