DBRS Updates Its Report on Newfoundland Power Inc.

DBRS has today updated its report on Newfoundland Power Inc. (Newfoundland Power or the Company). DBRS continues to view the regulatory environment in Newfoundland and Labrador as supportive. Newfoundland Power continues to benefit from a favourable deemed equity component of 45% and reasonable allowed return on equity of 8.80% for the 2013 to 2015 period, as ordered by the Board of Commissioners of Public Utilities (PUB). It also has a number of automatic deferral accounts that limit its exposure to price risk, including: (1) a weather normalization reserve account that stabilizes earnings during extreme weather conditions, and (2) a rate stabilization account that absorbs fluctuations in purchased power costs. In addition, the PUB continues to regulate Newfoundland Power under a cost-of-service framework, which provides the Company the opportunity to recover all prudently incurred operating expenses and earn a reasonable return, whereas electricity distribution utilities in Ontario and Alberta have shifted to an incentive regulatory framework.

For the nine months ended September 30, 2013 (9M2013), Newfoundland Power’s financial profile remained reasonable for the current rating category, supported by the stable earnings and cash flow from its regulated distribution operations. Although the Company funded its modest free cash flow deficit in 9M2013 with debt, this did not have a material impact on key financial metrics. The debt-to-capital ratio, EBIT interest coverage and cash flow-to-debt ratio for the last twelve months ended September 30, 2013, improved slightly from the 2012 year end to 54.3%, 2.88 times and 19.0%, respectively. This is mainly because Newfoundland Power generated sufficient cash flow internally to fund the bulk of its capital expenditures and dividends. DBRS expects the Company to continue to fund its modest free cash flow deficits through debt and does not expect this to have a material impact on key credit metrics.

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.