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 are based on the Company's stable regulated electricity distribution business, which operates under a reasonable regulatory environment under the Ontario Energy Board.

There have been no material changes to Toronto Hydro's business risk assessment since the last rating confirmations. The Company continues to operate under the Custom Incentive Rate-setting framework as approved for 2020 to 2024. DBRS Morningstar notes Toronto Hydro has begun preparation work for its next distribution rates application for the 2025 to 2029 period. DBRS Morningstar will monitor progress on the application for any implications on the Company's credit profile.

Toronto Hydro's financial risk assessment has been supportive of the "A" ratings, with all key credit metrics in line with the current rating category. DBRS Morningstar notes, however, the Company's metrics weakened in 2022 because of the significant capital expenditures (capex) program (gross capex of $675 million for the year) to maintain safety and reliability, support a growing city, enable clean energy, and prepare for and respond to extreme weather. Toronto Hydro's financial ratios may continue to weaken over the next few years as the ongoing capex program will likely require substantial debt financing. DBRS Morningstar expects the Company to be prudent in managing its debt load in order to maintain leverage in line with the regulatory capital structure of 60% debt. However, should the Company's key credit metrics weaken to a level no longer commensurate with the "A" rating category for a sustained period of time (cash flow-to-debt less than 12.5%, debt-to-capital more than 65.0%, and EBIT-interest coverage less than 1.80 times), a negative rating action may occur. Conversely, a positive rating action is considered unlikely at this time given the capex program in place and the current business risk assessment.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 13, 2022; https://www.dbrsmorningstar.com/research/402616).

The following methodology has also been applied:
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196/).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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