DBRS Updates Report on Newfoundland and Labrador Hydro

DBRS has today updated its report on Newfoundland and Labrador Hydro (Hydro or the Company). The credit ratings of the Company are a flow-through of the ratings of the Province of Newfoundland and Labrador (the Province; see DBRS’s report on the Province dated July 26, 2011), which unconditionally guarantees all of Hydro’s outstanding debt. The unconditional guarantee extends to principal, interest and, where applicable, sinking fund payments relating to the Company’s promissory notes, debentures and long-term loans.

As outlined in Hydro’s long-term asset management program, the Company is undergoing a period of substantial capital expenditures (capex) to maintain its generation and transmission assets. This calls for an increase in debt levels, leading to higher leverage. However, interest coverage is expected to remain relatively stable as earnings grow to reflect a higher rate base. Following Hydro’s next general rated application, which is expected in 2012, the Board of Commissioners of Public Utilities will set Hydro’s deemed return on equity (ROE) equal to that of Newfoundland Power (rated “A” by DBRS), which is set at 8.80%. The increased ROE is expected to help improve Hydro’s earnings and overall financial profile. Operating cash flow remained relatively stable at approximately $145 million in 2011 (versus $142 million in 2010). Capital expenditures have remained high over the past five years, well above historic depreciation levels, as the Company continues to spend on maintenance. Capex is expected to remain above historical levels in the medium to long term, reaching around $150 million in 2014. Dividends declared were approximately 89.8% of Hydro’s earnings in 2011, which are used to maintain its regulated debt-to-capital structure. The Company generated negative free cash flow of approximately $21 million in 2011. Free cash flow deficits were funded through cash on hand. DBRS anticipates that going forward free cash flow deficits will be funded through a combination of internally generated cash and the appropriate mix of short and long-term debt.

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

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.