DBRS Confirms Newfoundland Power at “A” and Pfd-2

DBRS has today confirmed the ratings of the First Mortgage Bonds and 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, strong balance sheet, and consistent operating results.

The Company’s rate of return on rate base for ratemaking purposes was reduced to 7.96% in 2011 (8.23% in 2010), with a range of 7.78% to 8.14%. This reflects a regulated return on common equity (ROE) of 8.38% for 2011, down from 9.00% in 2010; the 8.38% was set explicitly by the automatic adjustment formula used as a mechanism to establish customer rates between general rate hearings. The Board of Commissioners of Public Utilities has approved Newfoundland Power’s request to suspend the use of the automatic adjustment formula in 2012 (approved ROE and return on rate base in 2012 are on an interim basis, awaiting the full cost of capital review in 2012). The 8.38% ROE for 2011 is among the lowest regulatory ROEs in the country.

Despite a low regulated return on rate base, the Company continues to benefit from the following characteristics: (1) a favourable deemed equity ratio of 45%; (2) a weather normalization reserve account that stabilizes earnings during extreme weather conditions; (3) a rate stabilization account that absorbs fluctuations in purchased power costs; and (4) a pension expense variance deferral account and other post-employment benefits cost deferral account. Newfoundland Power operates in a stable and supportive regulatory environment, allowing for the material pass-through of all power-generation and procurement-related costs, and the full recovery of all prudently incurred operating expenses and capital expenditures, within a reasonable time frame, which significantly reduces operating risk.

Although Newfoundland Power has a strong parent organization, through Fortis Inc. (Fortis, rated A (low) with a Stable trend; see the September 7, 2011, 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 capability to provide equity support if required by Newfoundland Power.

Note:
The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.