DBRS Confirms Nova Scotia Power Inc. Ratings

DBRS Limited (DBRS) has confirmed the Issuer Rating and Unsecured Debentures & Medium-Term Notes rating of Nova Scotia Power Inc. (NSPI or the Company) at A (low) as well as its Cumulative Preferred Shares rating at Pfd-2 (low) and its Commercial Paper rating at R-1 (low). All trends are Stable. The rating confirmations reflect the Company’s relatively low business risk profile operating under a reasonable regulatory environment in Nova Scotia (the Province), albeit somewhat below average compared to other provinces that have privatized or deregulated their power sectors. The confirmations also reflect NSPI’s reasonable financial risk profile, with all key credit metrics expected to remain in line with the current rating category and within regulatory parameters.

Over the past year, there has been no material changes to NSPI’s business risk profile, which remains commensurate with the current rating category. In 2015, NSPI continues to operate under a reasonable regulatory system that allows the company 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% (actual ROE has historically been in the upper-end of the target ranges). NSPI’s current business risk rating, which is one-notch below that of the DBRS industry risk rating of “A,” factors in the Company’s below-average regulatory lag compared to domestic peers, particularly related to its fuel cost recovery. Fuel costs are also subject to an independent audit by the Nova Scotia Utility and Review Board (UARB), which could potentially disallow a portion of the fuel-related costs. In January 2015, the UARB disallowed $5.1 million of 2012 and 2013 fuel-related costs (before interest); however, this amount is not considered material by DBRS. The Company’s business risk profile also reflects the challenges associated with the Province’s high electricity rates, which may make it increasingly challenging for NSPI to fully pass costs onto the ratepayers in a timely manner if generation costs rise faster than anticipated. Going forward, should significant fuel-related costs be disallowed, and/or if substantial costs are not recovered or could only be recovered over an extended period of time, this could have a negative impact on NSPI’s credit quality.

NSPI’s financial risk profile remained reasonable for the current rating and is expected to remain relatively stable, with all key credit metrics in the “A” rating range. In 2015, operating cash flow should sufficiently support the Company’s capital expenditures program ($273 million announced for 2015). NSPI is expected to continue to manage its dividend payout to its parent company, Emera Inc. (rated BBB (high), Under Review with Developing Implications) in order to maintain its debt-to-capital ratio within regulatory parameters. 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2014), Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2014), which can be found on our website under Methodologies.