DBRS Comments on Toronto Hydro Receiving Equity from the City of Toronto

DBRS Limited (DBRS) notes that Toronto Hydro Corporation (THC or the Company; rated “A” with a Stable trend by DBRS) announced that it has received the $250 million equity contribution from its sole shareholder, the City of Toronto (the City; rated AA with a Stable trend by DBRS), that was announced in December 2016. In response to the equity contribution, THC has announced that it is revising its dividend policy to pay the City $75 million for 2017, up from $25 million, and 60% of THC’s previous year’s net income for subsequent years. In November 2016, THC decided to reduce annual dividends to $25 million, a departure from its policy to pay 50% of the previous year’s net income (approximately $75 million for 2016). The decision was made by THC to use more of its cash for the Company’s significant capital expenditure program to maintain the safety and reliability of the electricity distribution grid and to address the considerable and growing pressures on the Company’s credit metrics.

DBRS views the capital contribution by the City as a positive outcome as it is expected to immediately alleviate the pressure on THC’s credit metrics. However, the new dividend policy to pay 60% of net income is expected to partially offset the benefit of the equity contribution. Overall, DBRS expects to see credit metrics improve gradually over the next two to three years and stabilize thereafter, with cash flow-to-debt and debt-to-capital remaining at or near 15% and 60%, respectively, in the medium term.

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

The principal 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 dbrs.com under Methodologies.

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