DBRS Confirms Newfoundland Power Inc. at “A” and Pfd-2, Stable Trends

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, both with Stable trends. The rating confirmations reflect Newfoundland Power’s low business risk, which stems from the regulated nature of its operations, supported by a reasonable regulatory environment, stable financial profile and strong customer base.

The Company’s business risk profile is viewed as strong, as virtually all of its earnings are generated from the regulated electricity business, which operates under a reasonably stable regulatory framework in Newfoundland and Labrador (regulated by the Board of Commissioners of Public Utilities (PUB)). The Company’s rate of return on rate base increased to 8.14% in 2012 (7.96% in 2011) with a range of 7.96% to 8.32%. This reflects a regulated return on equity (ROE) of 8.80%, up from 8.38% in 2011. The Company has an approved equity component at a maximum of 45% and recovers prudently incurred capital expenditures (capex) in a timely manner. In addition, the Company has relatively limited exposure to power price risk, as the Company continues to benefit from (1) a weather normalization reserve (WNR) account that stabilizes earnings during extreme weather conditions and (2) a rate stabilization account (RSA) that absorbs fluctuations in purchased power costs.

Newfoundland Power’s financial profile has been reasonable, supported by stable earnings and cash flow, as well as reasonable debt leverage. The growth in earnings has benefited from new home constructions and strong economic growth, mainly as a result of increased activity in nickel and iron ore mining as well as oil and gas activities in Newfoundland and Labrador. Newfoundland Power continues to generate sufficient cash flow internally to fund the bulk of its capex and dividends. The Company’s modest cash flow deficit is expected to continue to be funded through debt and is not expected to have a material impact on key metrics.

Notes:
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.