DBRS Confirms Newfoundland Power Inc. at “A” with Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and First Mortgage Bonds rating of Newfoundland Power Inc. (Newfoundland Power or the Company) at “A,” and the Preferred Shares - cumulative, redeemable rating at Pfd-2, all with Stable trends. The confirmations are based on the stability of the Company’s regulated integrated electricity business, primarily electricity distribution, and its solid financial risk profile.

Newfoundland Power’s business risk profile is supported by the Company’s regulated operations under the Board of Commissioners of Public Utilities (PUB). The PUB regulates Newfoundland Power under a cost-of-service regime, which allows the Company an opportunity to recover all prudent expenses and earn a reasonable return on its investments. In June 2016, the PUB released its decision on the Company’s 2016–2017 General Rate Application, approving an allowed return on equity (ROE) of 8.5% and deemed equity of 45%. DBRS notes that although allowed ROE has decreased from the previous 8.8% and is now one of the lowest in Canada, the Company’s cash flows are partially mitigated by maintenance of the above average deemed equity component. DBRS also continues to view regulation under the PUB as reasonable, with the Company benefitting from having a Rate Stabilization Account and a Weather Normalization Account to help reduce volatility in earnings and the annual pre-approval of its capital budget that provides more certainty regarding capital cost recovery. DBRS remains concerned with the potential for a large increase in electricity rates for the Province of Newfoundland and Labrador when the Muskrat Falls project, currently under construction by Nalcor Energy, comes on line in 2019/2020. While it is currently uncertain how the cost of the project will be recovered from the Company’s customers, should the potential upward pressure on rates affect Newfoundland Power’s ability to pass on costs, this could result in a negative rating action.

Newfoundland Power’s financial risk profile remains solid, with all key credit metrics supportive of the current ratings. The Company continues to experience elevated capital expenditures (capex), spending $113 million in 2015, mostly for maintaining its network. Although the large capex has resulted in net free cash flow deficits, Newfoundland Power has prudently managed these deficits through dividend management and debt issuances in order to maintain its leverage in line with the regulated capital structure. DBRS expects the Company to continue to manage any deficits in a prudent manner during this period of higher capex (approximately $107 million for 2016 and $89 million for 2017). Going forward, DBRS expects key credit metrics to remain in line with the current rating category.

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.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving a copy of this report, contact us at info@dbrs.com.