Mr. Tom Li of DBRS reports

Issuer rating:  Newfoundland Power Inc.

Debt rated:  Issuer rating

Rating:  A

Trend:  Stable

Rating action:  Confirmed

Issuer rating:  Newfoundland Power Inc.

Debt rated:  First mortgage bonds

Rating:  A

Trend:  Stable

Rating action:  Confirmed

Issuer rating:  Newfoundland Power Inc.

Debt rated:  Preferred shares -- cumulative, redeemable

Rating:  Pfd-2

Trend:  Stable

Rating action:  Confirmed

DBRS Ltd. has confirmed the issuer rating and first mortgage bonds rating of Newfoundland Power Inc. (Newfoundland Power or the company, a subsidiary of Fortis Inc.) at A, and the preferred shares -- cumulative, redeemable rating at Pfd-2, all with stable trends. The confirmations reflect the stable nature of the company's regulated electricity distribution business and its solid financial risk profile.

Newfoundland Power's business risk profile continues to be supported by the reasonable regulatory regime in Newfoundland and Labrador. The company, which is regulated by the Board of Commissioners of Public Utilities (PUB), operates under a cost-of-service framework, which allows Newfoundland Power to recover all prudently spent operating expenses and earn a reasonable return. The company currently has an allowed return on equity (ROE) of 8.80 per cent and regulated capital structure of 45 per cent common equity, which is comparable with its peers across Canada. Newfoundland Power also benefits from having a rate stabilization account (RSA) and a weather normalization account (WNA), which help reduce volatility in its earnings. These accounts limit the company's exposure to power price risk as the RSA passes through to customers changes in the cost and quantity of fuel burned by the company's main power supplier, Newfoundland and Labrador Hydro (rated A with a stable trend by DBRS), while the WNA stabilizes earnings during extreme weather conditions.

Newfoundland Power filed an application with the PUB in April, 2015, to approve a return on rate base for 2016 of 7.38 per cent, a 2016 cost-recovery deferral of approximately $4.0-million and to defer the company's next general rate application (GRA) filing to on or before June 1, 2016. The PUB denied the application and confirmed that the company will be required to file its next GRA by Oct. 16, 2015, to establish customer electricity rates for 2016. DBRS does not expect any material changes from the GRA but notes that a lower approved ROE is a possibility due to the current low interest rate environment. A modest decrease in the allowed ROE is not expected to have a material impact on the company's operations.

The company's financial risk profile remains solid with all key credit metrics in line with the current rating category. Newfoundland Power is currently experiencing elevated capital expenditures (capex; $117-million of gross capex in 2014) in order to maintain its distribution infrastructure and to connect new customers to the system. The company, which has forecast average capex of $108-million for the next five years, has financed its capex and dividends through internally generated cash flow while modest free cash flow deficits have been financed with debt. DBRS expects the company to continue to manage these deficits prudently through dividend management (quarterly common share dividends decreased to 23 cents per share for 2015, from 56 cents per share in 2014) and debt financing in order to maintain its leverage in line with the regulatory capital structure.