20180126Avista to Staff_DR_118(H1) Attachment D.PDF

Rating Action: Moody's Affirms Hydro One's senior unsecured A3 ratings;
outlook changed to negative
Global Credit Research - 19 Jul 2017
Approximately $11 billion of debt affected
Toronto, July 19, 2017 -- Moody's Investors Service, ("Moody's") affirmed the ratings of Hydro One Inc. (HOI)
A3 senior unsecured; (P)A3 MTN program; commercial paper P-2 and changed the outlook to negative.
RATINGS RATIONALE
"The negative outlook on Hydro One Inc. reflects our view that the probability of extraordinary support from the
Province of Ontario will be reduced," said Vice President and Senior Credit Officer Gavin MacFarlane. "This
follows today's announcement that Hydro One Limited, the parent company of Hydro One Inc., plans to acquire
Avista Corp., a U.S. based electric and gas utility company."
The government will retain control of Hydro One Limited (HOL: unrated), the holding company that owns 100%
of HOI. The acquisition of Avista Corp. (Baa1 stable), the first major acquisition by the organization, will be
financed with about C$3.4 billion of holding company debt at the parent HOL level, which sits between HOI and
the Province of Ontario (Aa2 Stable) in the overall corporate structure, reducing the probability of support to
HOI from the Province. In addition, any provincial support would likely also provide indirect benefits to
ratepayers in U.S. jurisdictions, which further reduces the probability of support from the Province. Following
the completion of the Avista acquisition, we expect the government to continue to own between 40-50% of
HOL.
Consistent with other Canadian regulated utilities acquiring US regulated utilities, the announced acquisition
will rely on debt financing, a credit negative. The additional debt that Hydro One Limited plans to issue will not
limit the ratings of Hydro One Inc.
As a government related issuer, HOI's A3 rating reflects its baseline credit assessment (BCA) of baa1 with a
one notch uplift attributable to the historically moderate probability of extraordinary support from the Province of
Ontario. HOI's BCA of baa1 reflects its low business risk profile driven by its supportive regulatory
environment. We expect cash flow from operations to remain predictable and financial metrics to remain weak
for the ratings primarily as a result of the existing allowed return on equity and deemed capital structure
established by the regulator. The baseline credit assessment of baa1 remains unchanged following the
acquisition announcement.
Rating Outlook
The outlook on HOI is negative, reflecting the expectation of a declining probability of extraordinary support
from the Province.
What could change the rating: up
An upgrade at this time is unlikely given the negative outlook. The rating outlook could return to stable at the
current rating level based on an upgrade to the baseline credit assessment of HOI offsetting the reduction in
the probability of extraordinary support. This could result from more favorable regulatory outcomes or a
sustained improvement in financial metrics including CFO pre-W/C to debt in the high teens (11.3% at
9/30/2016). A one notch upgrade of the Province would not lead to an upgrade of Hydro One.
What could change the rating: down
The proposed acquisition of Avista Corp. could lead to a downgrade of HOI. A downgrade of HOI's BCA would
lead to a downgrade of the senior unsecured rating, so long as Moody's opinion of likely support from the
Province remains unchanged or is reduced. This could result from a deterioration in regulatory outcomes or
financial metrics, including CFO pre-W/C to debt below 11% on a sustained basis (11.3% at 9/30/2016). A one
notch downgrade of the Province would not lead to a downgrade of HOI.
Staff_DR_118(H1) Attachment D Page 1 of 5
The methodologies used in these ratings were Regulated Electric and Gas Utilities published in June 2017 and
Government-Related Issuers published in October 2014. Please see the Rating Methodologies page on
www.moodys.com for a copy of these methodologies.
Outlook Actions:
..Issuer: Hydro One Inc.
....Outlook, Changed To Negative From Stable
Affirmations:
..Issuer: Hydro One Inc.
....Senior Unsecured Commercial Paper, Affirmed P-2
....Senior Unsecured Medium-Term Note Program, Affirmed (P)A3
....Senior Unsecured Regular Bond/Debenture, Affirmed A3
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain
regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or
category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this
announcement provides certain regulatory disclosures in relation to the credit rating action on the support
provider and in relation to each particular credit rating action for securities that derive their credit ratings from
the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be
assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms
have not changed prior to the assignment of the definitive rating in a manner that would have affected the
rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on
www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this
credit rating action, and whose ratings may change as a result of this credit rating action, the associated
regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following
disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated
entity.
The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment
resulting from that disclosure.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related
rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal
entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures
for each credit rating.
Gavin MacFarlane
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Staff_DR_118(H1) Attachment D Page 2 of 5
Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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