DBRS Updates Its Report on Newfoundland and Labrador Hydro

DBRS has today updated its 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 (the Province; rated “A” and R-1 (low) with Stable trends; see DBRS’s report on the Province dated December 4, 2013), 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.

Hydro requires significant external financing as it undergoes a period of elevated capital expenditures (capex) to upgrade and replace aging infrastructure, maintain service reliability and expand the system to meet load growth. The Company is forecasted to have capex of approximately $322 million in 2014 and its long-term asset management plan calls for an additional $1.1 billion of investments from 2015 to 2019. This projected capex is significantly above the historical depreciation level of around $70 million per year and will require substantial external funding. Major projects for the Company include (1) the purchase and installation of a 120 megawatt gas turbine at the Holyrood Thermal Generating Station (approximately $119 million), (2) the construction of the Labrador West Transmission Line (approximately $291 million), and (3) the construction of a transmission line from Bay d'Espoir to the Avalon Peninsula (approximately $343 million).

Hydro expects to generate higher earnings and cash flow, driven by both a higher rate base and improved regulatory parameters (following the approval of its general rate application (GRA) for new rates effective January 1, 2014, by the Board of Commissioners of Public Utilities (PUB)). The application remains on file with the PUB, but due to significant delays in the GRA process, new rates have yet to be implemented in 2014. Hydro is preparing to file an update in fall 2014 to request for additional revenue based on updated 2014–2015 test years. Once approved, the new rates will reflect a return on equity (ROE) of 8.80%, an increase from 4.47% in 2013, and equal to that of Newfoundland Power Inc. (rated “A”). The higher ROE is expected to increase annual earnings and cash flow by approximately $20 million, which will be used to partially finance the capital programs, with the balance to be funded through the issuance of debt. The Company has forecasted approximately $1.2 billion of additional debt in the next five years in order to fund the planned capex. However, these debt issuances, which will be guaranteed by the Province, will not have a material impact on the Company’s credit profile.

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

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.