DBRS Morningstar Confirms Ratings of Toronto Hydro Corporation with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Toronto Hydro Corporation's (THC or the Company) Issuer Rating and Senior Unsecured Debentures & MTNs rating at "A" and the Commercial Paper rating at R-1 (low), all with Stable trends. The ratings are based on THC's regulated electricity distribution business, which generates a steady stream of earnings and cash flows.

In December 2019, the Ontario Energy Board (OEB) issued its decision on THC's 2020 to 2024 Custom Incentive Rate-setting (Custom IR) plan. The mechanism of the approved plan is largely a continuation of the 2015 to 2019 Custom IR plan, with rates to increase annually by inflation less productivity, stretch, and growth factors plus a capital factor that will allow the Company to recover and earn a return on its large capital expenditures (capex) program in a timely manner. DBRS Morningstar notes the approval will provide stability for THC as well as certainty of funding for its capex program ($2.9 billion over the five-year term).

THC's financial risk assessment remained reasonable, with key credit metrics supportive of the "A" rating. As a result of the large capex program for the maintenance and refurbishment of aging infrastructure, the Company is expected to continue generating net free cash flow deficits over the medium term. As these deficits will likely be funded through debt, DBRS Morningstar expects THC’s key credit metrics to weaken modestly year-over-year but remain within the "A" rating category. DBRS Morningstar had expected earnings and cash flow to be steady in 2020, with the higher rate base partly offset by the lower approved return on equity (ROE; 8.52% for 2020 to 2024 versus 9.30% for 2015 to 2019). However, as a result of the ongoing Coronavirus Disease (COVID-19) pandemic, results for 2020 will likely be moderately weaker. Although income from residential customers should remain in line with expectations as distribution rates for this customer class are decoupled, income from commercial and industrial customers will likely be negatively affected by the lower throughput. This impact should be partly offset by deferral accounts for costs or lost revenues arising from the COVID-19 pandemic authorized by the OEB for all local distribution companies; recovery of any amounts will be subject to OEB approval though. Overall, DBRS Morningstar expects THC's key credit metrics in 2020 to remain in line with the current ratings. A positive rating action is unlikely in the medium term, given the uncertainty about the COVID-19 pandemic and the ongoing large capex program. A negative rating action could occur if the Company's cash flow-to-debt ratio weakens to a level no longer commensurate with the current rating category (below 12.5%) and the debt-to-capital ratio exceeds 60% over a sustained period.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (September 2019), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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