DBRS Confirms Nova Scotia Power at A (low), Stable

DBRS has today confirmed the ratings of the Unsecured Debentures & Medium-Term Notes, Commercial Paper and Cumulative Preferred Shares of Nova Scotia Power Inc. (NSPI or the Company) at A (low), R-1 (low) and Pfd-2 (low), respectively, all with Stable trends. The ratings are underpinned by NSPI’s low business risk, stemming from the regulated nature of its operations supported by a reasonable regulatory environment, good growth potential and its strong financial profile.

The Company’s business risk profile is viewed as strong, as all of its earnings are generated from the regulated electricity business, which operates under a reasonable regulatory framework in Nova Scotia (regulated by the Nova Scotia Utility and Review Board). For 2012, the Company’s allowed earning range is between 9.1% and 9.5% on a maximum common equity of 40%. The rates are based on 9.2% return on equity and a deemed equity component of 37.5%. These rates will allow the Company to recover prudently incurred capital expenditure (capex) in a timely manner.

In addition, the certainty of fuel cost recovery from customers through the implementation of the fuel adjustment mechanism is expected to contribute to predictable earnings and cash flow at NSPI. NSPI is allowed to recover non-fuel charges incurred associated with the closure of the NewPage Port Hawkesbury paper mill, NSPI’s largest customer, starting 2013. While the deferred recovery is seen as a negative, the amount deferred ($43 million) is not viewed as material enough to have an impact on NSPI’s ratings. However, future deferrals of amounts significant enough to affect NSPI’s liquidity could have an impact on its ratings.

NSPI continues to generate free cash flow deficits as a result of the ongoing large capex spending, largely driven by new investments in renewable generation mandated by the Province of Nova Scotia. The Company has financed its capex with a balanced mix of equity and debt issuances. As a result, NSPI was able to maintain its balance sheet leverage in line with its current rating range. DBRS expects the Company to continue to grow its rate base in a prudent manner.

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

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on the DBRS website under Methodologies.