DBRS Updates its Report on Newfoundland and Labrador Hydro

DBRS Limited (DBRS) has updated its report on Newfoundland and Labrador Hydro (Hydro or the Company). The ratings assigned to the Company’s Guaranteed Long-Term Debt and Guaranteed Short-Term Debt 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 by DBRS; see DBRS’s report on the Province dated November 20, 2014), 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. Please see “DBRS Criteria: Guarantees and Other Forms of Explicit Support” for further detail.

In 2014, Hydro continued to execute on its long-term asset management plans to upgrade and replace aging infrastructure, maintain service reliability and expand the system to meet load growth. The Company had $209 million of capital expenditures (capex) in the year, including $95 million for the purchase and installation of a 100 megawatt gas turbine at the Holyrood Thermal Generating Station (total capex of approximately $129 million). In its 2016 to 2020 Capital Plan, Hydro plans to invest approximately $873 million over the five-year period, including $291 million on the construction of a transmission line from Bay d’Espoir to the Avalon Peninsula. While capex in 2015 (approximately $136 million) is expected to be lower than in 2014 as a result of a temporary suspension in the $330 million Labrador West Transmission Project, capex is expected to remain significantly above the historical depreciation level of around $70 million per year and will require substantial external funding.

As a result of significant delays in the general rate application process initiated in July 2013, Hydro filed an amended application with the Board of Commissioners of Public Utilities in November 2014 using 2015 forecast costs. Once approved, the new rates will reflect a return on equity (ROE) of 8.80%, an increase from 4.47% in 2013, which is equal to that of Newfoundland Power Inc. (rated “A” with a Stable trend by DBRS). The higher ROE, as well as increase in the rate base (forecast rate base of $1.8 billion in 2015 versus $1.5 billion in 2013), is expected to result in higher earnings and cash flows to help finance the significant capex, with the balance to be funded through the issuance of debt. The Company has forecast approximately $700 million of additional debt in the next four 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 (October 2014) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2014), 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.