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

DBRS Limited (DBRS Morningstar) confirmed Newfoundland Power Inc.’s (Newfoundland Power or the Company) Issuer Rating and First Mortgage Bonds rating at “A.” All trends are Stable. The ratings 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 profile.

Newfoundland Power is regulated under cost-of-service regulation by the PUB and continues to benefit from multiple regulatory deferral accounts, reducing volatility in earnings and cash flows. In January 2019, the PUB approved the Company’s 2019/2020 General Rate Application, with an allowed return on equity of 8.5% and a deemed equity component of 45.0% for 2019 to 2021.

The biggest challenge the Company faces is a potential rate shock for ratepayers from the Muskrat Falls project, an 824-megawatt (MW) hydroelectric generating facility expected to be fully commissioned in 2021. A rate shock could severely reduce electricity volumes and affordability for Newfoundland Power's customers and negatively affect the Company’s earnings and cash flows. On February 7, 2020, the PUB provided its final rate mitigation report to the Province of Newfoundland and Labrador (the Province; rated A (low) with a Negative trend by DBRS Morningstar) on potential options to mitigate the impact of the Muskrat Falls project on electricity prices, but it is currently uncertain how relief will be provided to ratepayers. DBRS Morningstar continues to monitor the situation and treats a potential rate shock as an event risk. DBRS Morningstar expects the Province to provide financial support to the ratepayers to soften the impact of a rate shock; on September 25, 2020, the Province reiterated its commitment to mitigate the risk of a rate shock associated with Muskrat Falls.

DBRS Morningstar also notes that current weak oil prices and the ongoing Coronavirus Disease (COVID-19) pandemic have negatively affected already weak provincial economic conditions. Prolonged weak economic conditions could significantly affect affordability for Newfoundland Power's customers. However, DBRS Morningstar believes that the Company's strong financial profile provides enough flexibility to absorb any short-term negative impact on cash flow to support the current ratings.

Newfoundland Power’s key credit metrics remained solid for the current ratings in 2019 and for the last 12 months ending June 30, 2020. The Company’s earnings and cash flows have largely remained steady year over year, reflecting the stable nature of its operations. Newfoundland Power is expected to have moderate free cash flow deficits for the next few years. DBRS Morningstar expects the Company to manage these deficits prudently to maintain leverage in line with the regulatory capital structure, allowing key credit metrics to stay within the current rating category. A positive rating action for the Company is unlikely in the near-to-medium term because of the weaker franchise area and uncertainty regarding the rate impact from the Muskrat Falls project. Although unlikely, if ratepayers’ ability to pay bills or Newfoundland Power’s ability to fully pass on costs is negatively affected, the Company’s ratings may be downgraded by multiple notches.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 16, 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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