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

DBRS Limited (DBRS) confirmed the Issuer Rating and First Mortgage Bonds rating of Newfoundland Power Inc. (Newfoundland Power or the Company) at “A” and the Preferred Shares – cumulative, redeemable rating at Pfd-2. All trends remain Stable. The confirmation is based on the continued stability of the Company’s regulated electricity business, which consists primarily of electricity distribution, and the solid financial risk profile.

Newfoundland Power’s business risk profile remains supported by the Company’s stable regulated integrated electricity business, which operates under a reasonable regulatory regime by the Board of Commissioners of Public Utilities. There have been no material regulatory changes since the last rating review in August 2016; the most recent General Rate Application decision released in June 2016 established a deemed equity component of 45% and an allowed return on equity of 8.5% until 2018. Newfoundland Power also 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 the Company’s earnings and cash flows.

DBRS remains concerned about the potential rate shock once the Muskrat Falls project, which is currently under construction by Nalcor Energy (Nalcor), comes on line in mid-2020. Nalcor expects that by 2020, rates in the Province of Newfoundland and Labrador 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 Newfoundland Power’s ability to fully pass on costs, or affect ratepayers’ ability to pay their electricity bills, this could result in a negative rating action.

Newfoundland Power’s financial risk profile remained solid in 2016 and for the 12 months ending June 30, 2017, with all key credit metrics supportive of the current ratings. While capital expenditures remains higher than 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 in order to maintain leverage in line with the regulatory capital structure. Going forward, DBRS expects key credit metrics to remain in line with the current rating category.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2016) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2016), which can be found on dbrs.com under Methodologies.