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

DBRS Limited (DBRS) confirmed the Issuer Rating and First Mortgage Bonds of Newfoundland Power Inc. (Newfoundland Power or the Company) at “A,” and the Preferred Shares – cumulative, redeemable at Pfd-2. All trends are Stable. The ratings of Newfoundland Power are supported by the Company’s stable regulated operations, mainly consisting of electricity distribution, the reasonable regulatory regime under the Board of Commissioners of Public Utilities (PUB) and a solid financial risk assessment.

Newfoundland Power’s business risk assessment has remained stable since the last rating review. The Company is regulated under cost-of-service by the PUB, with the most recent General Rate Application (GRA) establishing an allowed return on equity (ROE) of 8.5% and a deemed equity component of 45% for 2016 to 2018. In June 2018, Newfoundland Power filed its 2019/2020 GRA, requesting an allowed ROE of 9.5% and deemed equity component of 45%. A decision is expected in Q1 2019. DBRS notes that the Company continues to benefit from the use of multiple regulatory deferral accounts, such as the Rate Stabilization Account and the Weather Normalization Account, which significantly reduce volatility in earnings and cash flows.

DBRS continues to consider the uncertainty with the Muskrat Falls project, an 824-megawatt hydroelectric generating facility being developed by Nalcor Energy (Nalcor; 100% owned by the Province of Newfoundland and Labrador (the Province)), as the most significant challenge facing Newfoundland Power. Nalcor estimates that by 2021, electricity rates would increase to 22.9 cents per kilowatt hour (kWh), a substantial increase from current rates of 12.4 cents/kWh. DBRS remains concerned about the potential rate shock to ratepayers, which could severely reduce electricity volumes as well as the ability for ratepayers to afford their bills, in turn negatively affecting the Company’s earnings and cash flows. DBRS notes that in September 2018, the Province announced that the PUB will examine the Muskrat Falls project, including options on reducing its impact on rates. Should the upward pressure on rates affect Newfoundland Power’s ability to fully pass on costs, this could result in a negative rating action.

Newfoundland Power’s financial risk profile remained solid in 2017 and for the 12 months ending June 30, 2018 (LTM 2018), with all key credit metrics supportive of the current ratings. While earnings and cash flows were modestly weaker in LTM 2018, DBRS notes this was largely due to a change in the wholesale electricity rate charged by Newfoundland and Labrador Hydro (rated A (low) with a Stable trend by DBRS) to Newfoundland Power, effective July 1, 2017. As this change will not have an impact on earnings for the fiscal year, DBRS expects results for 2018 to be in line with 2017. While capital expenditures remain higher than the historical average, the moderate free cash flow deficits have remained manageable. DBRS expects the Company to continue managing free cash flow deficits in a prudent manner, with key credit metrics to remain in line with the current rating category.

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 2018) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2017), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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