DBRS Comments on OEB Decision on Toronto Hydro’s Electricity Distribution Rate Change

DBRS notes that on January 5, 2011, the Ontario Energy Board (OEB) announced that it had turned down Toronto Hydro Corporation’s (THC or the Company, rated A (high), Stable) electricity distribution rate increase application under the cost-of-service framework for the May 2012 to May 2014 period. DBRS expects the Company to proceed with a follow-up filing under the Incentive Regulation Mechanism (IRM) framework, as recommended by the OEB.

Under the IRM framework, the Company’s actual rate of return on equity in the next rate period will likely weaken from the current allowed level of 9.58%, due to challenges associated with operating efficiency improvement and potential restructuring charges. However, should THC reduce capital spending to around its approved depreciation level, key financial ratios – including interest coverage, leverage and cash flow ratios – are expected to be stronger under IRM than under the cost-of-service framework.

Notes:

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on the DBRS website under Methodologies.