DBRS Confirms Nova Scotia Power Inc. A (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Nova Scotia Power Inc. (NSPI or the Company) at A (low) and ratings on NSPI’s Unsecured Debentures & Medium-Term Notes, Commercial Paper and Cumulative Preferred Shares at A (low), R-1 (low) and Pfd-2 (low), respectively, all with Stable trends. The rating confirmations reflect the Company’s relatively low business risk assessment (BRA) 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.

Over the past year, there have been no material changes to NSPI’s BRA, 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 range). DBRS expects NSPI to achieve its actual ROE within the target range in 2015 and 2016 without a rate increase, benefiting from decreased pension and post-retirement obligations and improved operating efficiency.

NSPI’s BRA, 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, which could potentially disallow a portion of the fuel-related costs. The Company’s BRA 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.

NSPI’s financial risk assessment has remained reasonable for the current rating with overall key credit metrics in the “A” rating range. Operating cash flow should sufficiently support the Company’s capital expenditures program over the next several years. NSPI is expected to continue to manage its dividend payout to its parent company, Emera Inc. (Emera; 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. On October 15, 2015, NSPI redeemed all of its outstanding preferred shares for a total payment of $135 million, which was primarily financed with debt. However, leverage is expected to remain in line with the regulatory capital structure and the “A” rating category (low 60%).

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

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.