DBRS Updates Its Report on Newfoundland and Labrador Hydro

DBRS Limited (DBRS) 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 July 14, 2017), 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.

In December 2016, Hydro received a decision on its 2014 and 2015 General Rate Application (GRA) from the Board of Commissioners of Public Utilities (PUB). DBRS viewed the decision as positive for the Company as (1) it removed uncertainty regarding the recovery of revenue deficiencies from 2013 to 2016 and (2) the target return on equity (ROE) of 8.80% for 2014 and 2015 and 8.50% for 2016 was substantially higher than the last approved ROE of 4.47% in 2006. DBRS expects the higher ROE to result in stronger and more stable earnings and cash flows for the Company, especially during this period of significant capital expenditures (capex). Hydro is expected to spend around $346 million of capex for 2017, a significant increase from $248 million in 2016, as the Company continues construction on the Bay d’Espoir to Western Avalon transmission line upgrade (around $213 million in 2017; total cost of $292 million). Capex is expected to remain elevated at around $243 million in 2018, resulting in continued pressure on Hydro’s key financial ratios for the near term. However, Hydro’s leverage at the consolidated level remains reasonable, allowing for some financial flexibility during this period. DBRS notes the Company filed its 2017 GRA application with the PUB in July 2017 for rates effective 2018 and 2019.

DBRS remains concerned about the potential rate shock once the Muskrat Falls project, which is currently under construction by Nalcor Energy (Nalcor; 100% owner of Hydro and, in turn, 100% owned by the Province), comes on line in mid-2020. Nalcor expects that by 2022, rates in the Province will increase to 23.3 cents per kilowatt hour (kWh), which is a substantial increase from current rates of around 11.7 cents/kWh. Should the upward pressure on rates affect Hydro’s ability to fully pass on costs or affect ratepayers’ ability to pay their electricity bills, this could result in deterioration in Hydro’s key financial ratios.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on dbrs.com under Methodologies.

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