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 rating confirmations reflect a reasonable regulatory environment in Nova Scotia (the Province), although it remains somewhat below average compared to other provinces, which have privatized or deregulated their power sectors. The confirmation also reflects DBRS’s expectation that debt-to-capital will remain near the current level, at below 63%, to be in line with regulatory parameters.

NSPI’s business risk profile is supported by a reasonable regulatory system that allows NSPI to earn a return on equity (ROE) in the range of 8.75% to 9.25%, based on an equity thickness of up to 40%. These primary regulatory parameters are in line with those of other Canadian utilities. However, NSPI’s business risk profile rating is one notch below that of the DBRS industry risk rating of “A,” largely due to (1) below-average regulatory lag compared to domestic peers, particularly related to fuel cost recovery mechanism, and (2) challenges associated with rising electricity rates, which are already high. As generation costs potentially rise and ultimately test the political ceiling, it may be increasingly challenging for NSPI to pass costs on to the ratepayers in a timely manner. Profitability for the Company could be affected and result in a negative rating action if the following, or similar, outcomes occur: (1) a rate freeze or material impairments whereby incremental unforeseen costs are not recovered and/or (2) substantial costs that could only be recovered over an extended period of time.

The rating assumes that the Company will continue to manage its annual dividend payout to maintain its regulated capital structure. While capital expenditures (capex) are expected to remain elevated ($283 million announced for 2014), operating cash flow is estimated to be adequate to support capex. DBRS expects that the residual operating cash flow after capex, combined with the incremental debt to maintain the regulatory capital structure, will be distributed to NSPI’s parent company, Emera Inc. (Emera; rated BBB (high), Under Review with Developing Implications). DBRS will continue to view NSPI on a stand-alone basis, assuming the Company adheres to the current flexible dividend distribution strategy.

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.