DBRS Morningstar Confirms Ratings of Toronto Hydro Corporation With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures & MTNs rating of Toronto Hydro Corporation (Toronto Hydro or the Company) at "A," and the Commercial Paper rating at R-1 (low). All trends are Stable. The ratings of Toronto Hydro continue to be based on its regulated electricity distribution business, which operates under a reasonable regulatory framework by the Ontario Energy Board (OEB). The Stable trend reflects the Company's key credit metrics, which are in line with the "A" rating category.

Toronto Hydro's business risk assessments is supported by its regulated electricity distribution operation, which provides almost all of its earnings and cash flows. The Company is currently in the third year of its five-year Custom Incentive Rate-making (IR) regime, where rates increase annually by a custom price cap index which includes an inflation factor for operational expenditures and a capital factor for Toronto Hydro’s significant capital expenditures (capex) plan (approximately $2.9 billion for the Custom IR term). The Custom IR capital plan was proactively reviewed by the OEB and is funded through the rates approved by the OEB during the 2020-2024 Custom IR term. As such, DBRS Morningstar does not expect any material changes to Toronto Hydro's business risk assessment over the medium term.

Toronto Hydro's financial risk assessment remained supportive of the "A" rating. The Company's cash flow-to-debt and EBIT-interest coverage ratios improved in 2021 following the dip experienced in the previous year because of lower commercial customer usage from the Coronavirus Disease (COVID-19) pandemic. While commercial throughputs in 2021 continued to remain below pre-pandemic levels, Toronto Hydro was able to find efficiencies and manage its administrative expenses in order to meet its financial targets. DBRS Morningstar expects the Company's key credit metrics to remain in line with the "A" rating in 2022 with higher revenues from the growing rate base to offset any remaining impact from the pandemic. Given the current business risk assessment and the substantial capex program, DBRS Morningstar considers a positive rating action for Toronto Hydro unlikely. Although unlikely as well, a negative rating action may occur should there be an adverse regulatory decision or if the Company's key credit metrics weaken to a level no longer commensurate with the "A" rating category, such as if, over a sustained period, the cash flow-to-debt ratio falls below 12.5% and the debt-to-capital ratio exceeds 60%.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 24, 2021; https://www.dbrsmorningstar.com/research/384922) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022, https://www.dbrsmorningstar.com/research/393065), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

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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