DBRS Morningstar Confirms Newfoundland Power Inc. at “A” with Stable TrendsUtilities & Independent Power
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 (COS) regulation by the PUB and continues to benefit from multiple regulatory deferral accounts, reducing volatility in earnings and cash flow. Effective July 1, 2021, the PUB approved an effective increase of 2.5% in electricity rates charges to customers and on May 27, 2021, the Company has also filed for 2022/2023 general rate application (GRA); the GRA is currently under review by the PUB.
DBRS Morningstar considers the biggest challenge Newfoundland Power faces to be the potential rate shock for ratepayers from the Muskrat Falls project, an 824-megawatt hydroelectric generating facility developed by Nalcor Energy that is expected to be fully commissioned by the end of 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 flow. On July 28, 2021, the government of Newfoundland and Labrador and the Government of Canada announced an agreement in principle for the financial restructuring of the Muskrat Falls project. Although, DBRS Morningstar views this as a positive development, the uncertainty on future rates remains. DBRS Morningstar will continue to monitor the situation and treat a potential rate shock as an event risk.
DBRS Morningstar views weak provincial economic conditions with high dependence on volatile commodity prices as another challenge because it could significantly affect the affordability for Newfoundland Power's customers. In 2020, the Coronavirus Disease (COVID-19) pandemic and low oil prices severely affected the provincial economy. The monthly unemployment rate spiked to 17.9% in June 2020 from 12.4% in February 2020. However, DBRS Morningstar notes that provincial economic conditions have improved compared with the previous year because of higher oil prices and high vaccination rates. Nevertheless, 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 2020 and for the last 12 months ended June 30, 2021. The Company’s earnings and cash flow from operations 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 because of the maintenance and growth capital spending along with dividend payout. 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, DBRS Morningstar may downgrade the Company’s ratings by multiple notches.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 24, 2021; https://www.dbrsmorningstar.com/research/384922), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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.
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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.
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