DBRS Confirms Toronto Hydro Corporation at A (high), Stable Trends

DBRS has today confirmed the Issuer Rating, Short-Term Issuer Rating and rating of the Senior Unsecured Debentures & MTNs of Toronto Hydro Corporation (THC or the Company) at A (high), R-1 (low) and A (high), respectively, all with Stable trends. The rating confirmations reflect the 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, effective June 1, 2012, under the Incentive Regulation Mechanism (IRM) framework. In 2012, the Company spent approximately $290 million on capital expenditures (capex), approximately $147 million less than in 2011, due primarily to uncertainty regarding its electricity distribution rates for the 2012 rate year (May 2012 to April 2013). As a result, THC updated its incremental capital module (ICM) application in October 2012, modifying the requested capex for the 2012 and 2013 rate years to approximately $283 million and $579 million, respectively. In light of the regulatory uncertainty and IRM framework, the Company will be required to manage its capital program effectively in the short term, which could be challenging, given its aging infrastructure. DBRS expects the Company to continue to defer major capex for restoring its aging infrastructure and avoid stranded costs until there is greater regulatory certainty.

The confirmation incorporates DBRS’s expectation that the Company will maintain its debt-to-capital ratio in line with the regulatory 60% debt-to-40% equity structure. In the past two years, the proceeds from the sale of Toronto Hydro Telecom Inc. (approximately $200 million in cash) were used to maintain THC’s capital structure within regulatory approved levels. Although THC’s leverage decreased modestly in 2012 (57%) from 2011 (60%), leverage would likely rise in the medium-term as the Company continues to invest in infrastructure. Any 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 unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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.