DBRS Updates its Report on Newfoundland and Labrador Hydro

DBRS Limited (DBRS) has today 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 (low) and R-1 (low) with Stable trends by DBRS; see DBRS’s press release on the Province dated April 15, 2016), 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 Support” for further detail. DBRS views Hydro as self-supporting as it is able to fund its own operations and service its debt.

Hydro continued to execute on its large capital expenditures (capex) program in 2015, spending approximately $163 million for the year. Although this was substantially lower than in 2014, following the installation of a 100 megawatt gas turbine at Holyrood Thermal Generating Station, capex is expected to ramp up in 2016 (forecast of $263 million) with the beginning of construction on a transmission line from Bay d’Espoir to Western Avalon (total capex of approximately $292 million). Furthermore, in its 2017 to 2021 capital plan submitted to the Board of Commissioners of Public Utilities, the Company plans to invest an average of $194 million over the five-year period, significantly higher than historical levels. As a result, the high capex is expected to result in a weakening in Hydro’s key financial ratios for the near-term. DBRS notes, however, that leverage at the consolidated level remains reasonable, allowing for some financial flexibility during this period of significant capex. Additionally, with the decision for the general rate application expected by the end of the year, the rate increase should result in higher earnings and cash flows for the Company going forward to help fund its capex program.

DBRS remains concerned with the potential for a large increase in electricity rates for the Province when the Muskrat Falls project, currently under construction by Nalcor Energy (100% owner of Hydro, and is in turn 100% owned by the Province), 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 the Company’s ability to pass on costs, this could result in deterioration in Hydro’s key financial ratios.

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 2015), and DBRS Criteria: Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

The full rating 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.

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