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

DBRS has today confirmed the Issuer Rating and the First Mortgage Bonds of Newfoundland Power Inc. (Newfoundland Power or the Company) at “A”, and the Preferred Shares at Pfd-2, all with Stable trends. The rating confirmations reflect Newfoundland Power’s regulated electric distribution business with low business risk, combined with the Company’s stable financial profile and customer base.

Newfoundland Power’s business risk profile continues to be supported by a reasonable regulatory environment in Newfoundland and Labrador (regulated by the Board of Commissioners of Public Utilities (PUB)). The Company operates under a cost of service framework, which allows the Company to recover all prudently incurred operating expenses and earn a reasonable return. Pursuant to the PUB’s Order on Newfoundland Power’s 2013/2014 General Rate Application (GRA) (the 2013/2014 Order), the Company has an allowed return on equity (ROE) and common equity at 8.80% and 45%, respectively, for the 2013-2015 rate years. DBRS views the capital structure and ROE as reasonable when compared with other Canadian jurisdictions. In addition, Newfoundland Power has relatively limited exposure to power price risk, as the Company benefits 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.

The Company’s financial risk profile has also remained reasonable for the current rating category, supported by the stable earnings and cash flow from its regulated distribution operations. During the last twelve months ended June 30, 2014 (LTM Q2 2014), Newfoundland Power’s cash flow-to-total debt and EBIT interest coverage ratios increased to 19.2% and 3.10x, respectively, compared to 18.2% and 2.95x during the year ended December 31, 2013. In addition, the Company has been able to fund the majority of its capex and dividends through internally generated cash flow while modest cash flow deficits have been funded with debt. As a result, there has been no material impact on the Company’s key credit metrics.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.