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

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

The credit quality of NSPI is supported by its low business risk as all of its earnings are generated from the regulated electricity business in Nova Scotia (the Province), which is regulated by the Nova Scotia Utility and Review Board (UARB). Under the Province’s reasonable regulatory framework, the Company can recover all prudently estimated operating expenses and earn a reasonable return on approved capital investments. In 2012, the UARB issued an approved average net rate increase of 3% for all NSPI customers, effective January 1, 2013, and again on January 1, 2014. Rates were calculated based on a 9.0% return on equity and on a common equity component of 37.5%. In addition, the certainty of fuel cost recovery from customers, through the fuel adjustment mechanism, is expected to contribute to predictable earnings and cash flow at NSPI.

As a result of the ongoing large capital expenditure program that is mainly driven by investments in renewable generation mandated by the Province, combined with an increase in dividends, NSPI generated a free cash flow deficit of $97 million in 2012. The Company manages its annual dividend payout to maintain its regulated capital structure. The free cash flow deficit was financed with debt; however, NSPI’s balance sheet leverage and key credit ratios remained in line with its current rating range. Going forward, 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 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 applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.