DBRS Confirms Newfoundland Power at “A” with a Stable Trend

DBRS has today confirmed the ratings of the First Mortgage Bonds and the Preferred Shares of Newfoundland Power Inc. (Newfoundland Power or the Company) at “A” and Pfd-2, respectively; the trends remain Stable. The rating confirmations reflect Newfoundland Power’s low business risk stemming from the regulated nature of its operations and supportive regulatory environment, its strong balance sheet, its stable operating results and financial profile, as well as its stable customer base, which is composed entirely of residential and commercial customers.

The Company witnessed several regulatory decisions in 2010. Pursuant to the 2010 General Rate Application (2010 GRA), the Company’s rate of return on rate base for ratemaking purposes was set at 8.23%, with a range of 8.05% to 8.41%, for 2010. This reflects a regulated return on equity (ROE) of 9.00% for 2010 compared with 8.95% for 2009; the 9.00% was set explicitly by the regulator rather than by the Automatic Adjustment Formula, and was 52 basis points (bps) higher than the Automatic Adjustment Formula would have produced. However, for 2011 the Automatic Adjustment Formula was again used, and resulted in lower values: a rate of return on rate base of 7.96% in a range of 7.78% to 8.14% and a regulated ROE of 8.38%. While the 8.38% ROE for 2011 is among the lowest regulatory ROEs in the country, the Company continues to benefit from the following characteristics: (1) a favourable deemed equity ratio of 45%; (2) a weather normalization reserve (WNR) account that is used to stabilize earnings during extreme weather conditions; (3) a rate stabilization account (RSA) that absorbs fluctuations in purchased power costs relating primarily to the cost of fuel oil for the Company’s primary electricity supplier; and (4) a pension expense variance deferral account (PEVDA) and other post-employment benefits (OPEBs) cost deferral account. These features, combined with a stable and supportive regulatory environment that provides for a strong cost-of-service/rate-of-return rate-setting methodology, with a material pass-through of all power-generation and procurement-related costs, and a full recovery of all prudently incurred operating expenses and capital expenditures within a reasonable time frame, contribute to the Company’s favourable financial profile.

Newfoundland Power continues to demonstrate stable operating results reflective of its expanding customer base and rate base, despite declining regulatory-approved return on common equity. The prevailing low interest rate environment continues to have a negative impact on the approved ROE, but the impact on earnings and cash flows has been more than offset by growth in the rate base. During the last 12 months (LTM) ended September 30, 2010, operating results increased as a result of higher electricity sales, offset by higher operating expenses, finance charges, pension expense and amortization.

In November 2010, the Public Utilities Board (the PUB) approved a 2011 capital expenditure plan totalling $73 million. The approved application also determined and fixed the average rate base for the year ending December 31, 2009, at $848.5 million.

Although Newfoundland Power does have strong parentage through Fortis Inc. (Fortis, rated A (low) with a Stable trend; see the June 17, 2010, DBRS rating report), the Company is largely rated on a stand-alone basis. Fortis is a large, integrated electric and gas utility holding company that has the financial wherewithal to provide equity support if required by Newfoundland Power.

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

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas, and Pipelines), which can be found on our website under Methodologies.