DBRS Updates Report on Newfoundland and Labrador Hydro

DBRS has today updated its report on Newfoundland and Labrador Hydro (Hydro or the Company). The debt ratings are a flow-through of the ratings of the Province of Newfoundland and Labrador (the Province; see DBRS’s report on the Province dated August 10, 2012), 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 (LTAMP), 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 rate application (GRA), which is expected to be filed by the end of 2012, the Board of Commissioners of Public Utilities (PUB) will set Hydro’s deemed return on equity (ROE) equal to that of Newfoundland Power Inc. (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 decreased to approximately $60 million for the six months ended June 30, 2012 (H1 2012), from $65 million in H1 2011 due to lower revenue from the Company’s energy marketing segment, which was negatively impacted by the low natural gas price environment. Capital expenditures have remained high over the past five years, well above historical 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 approximately $150 million in 2014. Dividends declared were approximately 23% of Hydro’s earnings in H1 2012, which represented the non-regulated earnings. The Company was able to fund dividends and capex spending with its internally generated cash flow in H1 2012. 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.