DBRS Confirms Nova Scotia Power Inc. at 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 the 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 credit quality of NSPI has remained relatively stable over the past year, and is expected to remain intact through a three-year rate stability period (2017–2019). While incremental renewable power purchase costs will likely result in an average rate increase higher than the projected rate increase during the rate stability period (1.0% to 1.5% yearly through 2017–2019), DBRS expects NSPI’s rate increase in 2020 to be manageable.

Over the past year, there have been no material changes to NSPI’s business risk assessment (BRA), which remains commensurate with the current rating category. In 2016, 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%. NSPI’s deemed ROE band and equity thickness are in line with those of other comparable provinces, including British Columbia, Alberta, Ontario, Québec, and Newfoundland and Labrador. NSPI has a proven track record of sustaining profitability in line with its regulatory return parameters, earning at or near the top of the regulated ROE band over the past ten years. DBRS expects NSPI to continue to achieve its actual regulated ROE within the target range in 2016 and 2017, partly benefiting from NSPI’s focus on improving operating efficiency.

NSPI’s BRA of A (low), 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 NSPI’s high electricity rates, which may make it increasingly challenging for the Company to fully pass costs onto the ratepayers in a timely manner if generation costs rise faster than anticipated. In addition, NSPI could face a long-term challenge to adhere to the federal government’s accelerated plan to phase out the use of coal-fired electricity by 2030.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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