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

DBRS has today confirmed the rating of the Senior Unsecured Debentures & MTNs and Short-Term Issuer Rating 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 the continued stable earnings contribution from THC’s regulated distribution business and its reasonable credit profile.

On May 10, 2012, THC filed its application to set electricity distribution rates for the 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 in the next rate period is expected to weaken from the current allowed level of 9.58%, due to challenges associated with restructuring charges.

As the Company continues to refurbish its electricity distribution infrastructure to improve reliability, capital expenditures are expected to be well over the Company’s current depreciation level. In light of the IRM framework, the Company will be required to manage its capital program effectively within its regulatory limits, which could be challenging given THC’s aging infrastructure. The Company filed an incremental capital module (ICM) application in which it sought funding for capex of approximately $450 million to $500 million annually for the 2012 to 2014 period in order to maintain system reliability.

The confirmation incorporates DBRS’s expectation that the Company remains committed to maintaining its debt-to-capital ratio in line with the regulatory 60% debt-to-40% equity structure. This capital structure is expected to allow THC to spend approximately $300 million to $350 million annually on capex with reasonable rate increases. DBRS notes that THC’s leverage has increased over the years from approximately 55% in 2009 to 60% in the second quarter of 2012. Any additional significant increase in leverage or weakening of key credit metrics could cause THC’s credit risk profile to deteriorate to a level that is no longer commensurate with the current A (high) rating.

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.