DBRS Comments on Toronto Hydro’s Dividend Cut

DBRS Limited (DBRS) today notes that the Toronto Hydro Corporation’s (THC or the Company; rated “A” with a Stable trend by DBRS) Board of Directors has decided to reduce dividend payments to its sole shareholder, the City of Toronto (the City; rated AA with a Stable trend by DBRS), to $25 million per year from approximately $60 million to $70 million per year. The Company made the decision to use more of its cash resources for essential infrastructure investments to maintain the safety and reliability of the electricity distribution grid and to address the considerable and growing pressures on THC's capital structure.

In its April 27, 2016, press release entitled “DBRS Confirms Toronto Hydro Corporation at ‘A,’ Commercial Paper Rating at R-1 (low) with Stable Trends,” DBRS stated that it expects THC’s financial metrics to be pressured in the near to medium term as the Company incurs significant capital expenditure (capex) to serve a growing customer base and replace its aging infrastructure. DBRS also stated that it expects THC to manage its balance sheet prudently by exploring equity financing options with its sole shareholder or by potentially curtailing capex and dividends; and DBRS could take a negative rating action if the Company fails to maintain cash flow-to-debt and debt-to-capital at or near 15% and 60%, respectively, in the medium term.

DBRS expects that today’s decision to cut dividends saves THC approximately $40 million per year starting in 2017, which is expected to have a modestly positive impact on the Company’s credit metrics in the medium term by bringing the cash flow-to-debt and debt-to-capital closer to the middle of the “A” rating range.

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

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

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