DBRS Updates Report on Toronto Hydro

DBRS has today updated its report on Toronto Hydro Corporation (THC or the Company). The credit quality of Toronto Hydro Corporation (THC or the Company) reflects the continued 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 application under the cost-of-service framework for the May 2012 to May 2014 period. On May 10, 2012, THC filed its application to set electricity distribution rates for 2012, 2013 and 2014 rate years under the Incentive Regulation Mechanism (IRM) framework.

Under the IRM framework, the Company’s actual rate of return on equity (ROE) in the next rate period is expected to weaken from the current allowed level of 9.58%, due to challenges associated with 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 maintain reliability. On May 10, 2012, the Company filed its 2012-2014 incremental capital module (ICM) application seeking funding for total regulated capital expenditures of $448.7 million in 2012, $534.5 million in 2013 and $439.5 million in 2014. The OEB decision is expected in the third quarter of 2012.

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 approximately 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.