DBRS Confirms Ratings of Nova Scotia Power Inc., Stable Trends

DBRS Limited (DBRS) 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 and Commercial Paper at A (low) and R-1 (low), respectively, all with Stable trends. DBRS also discontinued the Cumulative Preferred Shares rating of the Company since they have been repaid. NSPI’s business risk profile continues to be stable and is underpinned by the reasonable regulatory environment in the Province of Nova Scotia (rated A (high) with a Stable trend by DBRS) with no material regulatory or operational changes over the last year, its cost of service model and good franchise strength. NSPI’s financial risk profile also continues to be stable with key credit metrics commensurate with the current rating category. The Stable trends underscore DBRS’s expectation that NSPI’s credit quality will remain intact through the three-year rate stability period (2017 to 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 to 2019), DBRS expects NSPI’s rate increase in 2020 to be manageable.

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. The Company 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 2017 and 2018, partly benefitting from the Company’s focus on improving operating efficiency. DBRS also notes that in September 2017, the Nova Scotia Utility and Review Board (NSUARB) approved NSPI’s interim assessment payment to NSP Maritime Link Inc. of the costs associated with the Maritime Link Project (excluding depreciation and amortization expenses) despite a delay in timing of energy delivery from the Muskrat Falls project.

NSPI’s business risk assessment (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 mechanism. Fuel costs are also subject to an independent audit by the NSUARB that 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 that could 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. Operating cash flow should sufficiently support the Company’s capital expenditure program over the next two 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 the Company on a stand-alone basis, assuming NSPI adheres to the current flexible dividend distribution strategy.

Notes:
The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

This rating is no longer endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.