DBRS Confirms Toronto Hydro Corporation at A (high) and R-1 (low), Stable Trends

DBRS has today confirmed the Senior Unsecured Debentures & Medium Term Notes and Short-Term Issuer ratings of Toronto Hydro Corporation (THC or the Company) at A (high) and R-1 (low), respectively. The trends are both Stable. The rating confirmations reflect relatively stable earnings contributions from THC’s regulated distribution business and a strong credit profile.

DBRS notes that on January 5, 2011, the Ontario Energy Board (OEB) announced that it had turned down THC’s 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 improvements and potential restructuring charges. In addition, the Company will be required to manage its capital program effectively within its regulatory limits. This could be a challenge in the medium term due to THC’s aging regulated electricity distribution infrastructure, which could require a costly and extensive refurbishment to improve reliability. However, in the near term, 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 as THC should reduce capital spending to around its approved depreciation level.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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