DBRS Releases Report on Newfoundland and Labrador Hydro

DBRS has today released a report on Newfoundland and Labrador Hydro (Hydro or the Company). The debt ratings of Hydro are a flow-through of the ratings of the Province of Newfoundland and Labrador (see DBRS’s report on the Province of Newfoundland and Labrador 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, 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. Hydro filed a general rate application with the Board of Commissioners of Public Utilities (PUB) in July 2013, requesting new rates effective January 1, 2014. Once approved by the PUB, new rates will reflect a return on equity (ROE) of 8.80%, which is equal to that of Newfoundland Power Inc. (rated “A”). The increased ROE is expected to help improve Hydro’s earnings and overall financial profile. Operating cash flow decreased modestly in 2012, mainly driven by higher fuel and purchase power costs, as well as lower wholesale electricity prices. Capex has remained high over the past five years, well above historical depreciation levels, as the Company continues to spend on maintenance and growth projects. Capex is expected to remain above historical levels in the medium to long term, reaching approximately $194 million in 2015. Dividends declared were approximately 44.4% of Hydro’s earnings in 2012. As a result, the Company experienced a free cash flow deficit that was funded with internally generated cash flow and incremental debt. 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.