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 August 23, 2018). Pursuant to the Newfoundland and Labrador Hydro Corporation Act, Hydro’s Long- and Short-Term Debt are either direct obligations of, or are guaranteed by, the Province. The unconditional guarantee extends to principal, interest and, where applicable, sinking fund payments relating to the Company’s promissory notes and debentures, with the exception of Series 1A (which is held by the Province) and the short term committed credit facility. Please see DBRS’s “Rating Canadian Provincial Agents of the Crown” methodology for further detail. DBRS views Hydro as self-supporting as it is able to fund its own operations and service its debt obligations.

In 2017 and for the last 12 months ending September 30, 2018 (LTM 2018), Hydro’s key financial ratios weakened as a result of a rising debt load and the timing in approval of its General Rate Application (GRA). The Company has had significant capital expenditures (capex; $386 million in 2017 and approximately $225 million for 2018) over the past few years, which had been primarily funded through debt. As a result, Hydro’s leverage has increased to 65.0% at the LTM 2018 from 56.7% in 2016. Additionally, earnings and cash flows decreased in the LTM 2018 as the Company’s GRA for rates effective 2018 has not yet been approved by the Board of Commissioners of Public Utilities (PUB); this has led to weaker cash flow-to-debt and EBIT-interest coverage ratios as well. DBRS notes that earnings and cash flows in 2019 may depend on the timing of regulatory decisions. However, with the capex program expected to be more moderate in 2019, increase in debt should be more modest for the year.

DBRS continues to consider the uncertainty with the Muskrat Falls project, an 824-megawatt hydroelectric generating facility being developed by Nalcor Energy (Nalcor; 100% owner of Hydro and is in turn 100% owned by the Province) as the most significant challenge facing Hydro. Nalcor estimates that by 2021, electricity rates would increase to 22.9 cents per kilowatt hour (kWh), a substantial increase from current rates of 12.3 cents/kWh. DBRS remains concerned about the potential rate shock to ratepayers, which could severely reduce electricity volumes as well as their ability to afford their bills, in turn negatively affecting the Company’s earnings and cash flows. In September 2018, the Province issued a Reference on Rate Mitigation Options and Impacts for the PUB to examine the Muskrat Falls project, including options on reducing its impact on rates. An interim report was provided to the Province in February 2019, with a final report to be provided by January 31, 2020.

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 Rating Canadian Provincial Agents of the Crown (April 2018), which can be found on dbrs.com under Methodologies & Criteria.

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.

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