DBRS Publishes Report on Nova Scotia Power Inc.

DBRS has today published a report on Nova Scotia Power Inc. (NSPI or the Company). The credit quality of NSPI is based on its low business risk, which stems from the regulated nature of its operations and is supported by a reasonable regulatory environment, good growth potential and a 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 that operates under a reasonable regulatory framework in Nova Scotia (regulated by the Nova Scotia Utility and Review Board). Rates were approved based on a 9.2% return on equity (ROE), applied to a 37.5% common equity component with a target earnings range of 9.1% to 9.5% on maximum actual equity of 40%. The Company can 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. Starting in 2013, NSPI will be allowed to recover non-fuel charges incurred related to the uncertainty of the NewPage Port Hawkesbury paper mill, NSPI’s largest customer, and the Bowater Mersey facility, which were eventually closed. While the deferred recovery is seen as a negative, the amount deferred ($53 million) is not material enough to have an impact on NSPI’s credit profile. However, future deferrals that significantly 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 capital expenditure program, largely driven by investments in renewable generation mandated by the Province of Nova Scotia. The Company 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 (May 2011), which can be found on our website under Methodologies.