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 (THC or the Company) at "A," and the Commercial Paper (CP) rating at R-1 (low). All trends are Stable. The confirmations reflect the stability of THC's regulated electricity distribution operations under the Ontario Energy Board and key credit metrics that remained supportive of the "A" ratings despite pressure from the ongoing Coronavirus Disease (COVID-19) pandemic.

There have been no material changes to THC's business risk assessment since DBRS Morningstar’s last review. In 2020, the Company entered the first year of its renewed Custom Incentive Rate-setting regime. This framework is largely a continuation of the previous regime and provides certainty of recovery for THC's large capital expenditures (capex) program ($2.9 billion over the five-year term). Given the current reasonable regulatory framework in place, DBRS Morningstar does not foresee any material changes to the Company's business risk assessment for the medium term.

THC's earnings and cash flow decreased in 2020 largely because of the impact from the ongoing pandemic. Lower electricity throughput and peak demand from general service and industrial customers, which includes commercial customers, combined with lower 2020 distribution rates, translated to a $37.5 million decrease in distribution revenue. Additionally, the Company recorded a $17.2 million increase in bad debt expense because of higher delinquencies. While bad debt expenses are expected to return to a more normal level in 2021, DBRS Morningstar expects distribution revenue to remain slightly pressured as the City of Toronto (rated AA with a Stable trend by DBRS Morningstar) remains in a lockdown situation for at least parts of Q1 and Q2 2021. While THC's key credit metrics weakened in 2020 because of the pandemic and a higher debt load to fund the significant capex program, the overall metrics remained supportive of the current ratings. DBRS Morningstar expects THC's key credit metrics to remain in line with the "A" ratings. However, a negative rating action may occur should 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 (October 27, 2020, https://www.dbrsmorningstar.com/research/368939) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021, https://www.dbrsmorningstar.com/research/375001), 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).

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 info@dbrsmorningstar.com.

This rating was not 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 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 info@dbrsmorningstar.com.

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