DBRS Confirms Ratings of Toronto Hydro Corporation with Stable Trends
Utilities & Independent PowerDBRS Limited (DBRS) confirmed Toronto Hydro Corporation’s (THC or the Company) Issuer Rating and Senior Unsecured Debentures & MTNs rating at “A” and Commercial Paper rating at R-1 (low). All trends are Stable. The ratings reflect THC’s low-risk electricity distribution business, underpinned by a transparent and supportive regulatory framework that serves an economically strong franchise area and provides relatively predictable earnings.
The business risk assessment of THC continues to be based on a transparent and supportive regulatory regime in Ontario. The Company is allowed to recover prudently incurred costs in a timely manner and earn an adequate return on equity (9.30% for 2015 to 2019). THC is now in the final year of its five-year Custom Incentive Rate-setting (CIR) plan approved by the Ontario Energy Board, which has provided the Company with funding certainty for its ongoing large capex program ($2.35 billion over the five-year period). In August 2018, THC filed its 2020 to 2024 CIR application, which is largely a continuation of the framework of the current CIR plan. The filing requested $4.3 billion in operating and capital costs for the term, including $844 million in the 2020 test year. A decision is expected at the end of 2019 or early 2020.
THC’s key credit metrics as at December 31, 2018, were largely steady from 2017 and remain within range for the current ratings. The Company’s significant capex program, however, is expected to continue to affect key financial metrics as additional debt is issued to fund the program. Capex for THC has largely been non-discretionary as it is focused on meeting growing customer demand, proactively addressing infrastructure renewal requirements and maintaining the reliability of the distribution grid. The Company has applied for average capex of around $560 million per year in its CIR application, an increase from $470 million per year for 2015 to 2019. Although THC’s operating cash flow is expected to grow in line with the rate base, the significant capex program and dividend policy will likely result in free cash flow deficits that will be funded with debt. DBRS notes that a ratings upgrade for THC is unlikely in the near term because of the large capex program. However, the ratings could be adversely affected should the Company fail to maintain cash flow-to-debt and debt-to-capital 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 & Criteria.
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 under Related Documents or by contacting us at info@dbrs.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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