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

DBRS Limited (DBRS) confirmed the Issuer rating of Nova Scotia Power Inc. (NSPI or the Company) at A (low). DBRS also confirmed the rating of the Company’s Unsecured Debentures and Medium-Term Notes at A (low) and the rating of its Commercial Paper at R-1 (low). All trends are Stable. The ratings reflect the stable operations of the Company’s regulated utilities in the Province of Nova Scotia (the Province; rated A (high) with a Stable trend by DBRS). NSPI’s key credit metrics continue to be supportive of the current rating. The Stable trends reflect DBRS’s expectation that NSPI’s key ratios will remain stable through the three-year rate-stability period, which extends until 2019. DBRS notes that post 2019, average rate increases will likely be higher than actual experienced rates during the rate-stability period, primarily driven by increased renewable power purchase costs; nevertheless, DBRS expects NSPI’s rate increase in 2020 to be manageable.

The regulatory environment for NSPI has remained relatively unchanged over the last year. NSPI operates 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%, in line with those of other comparable provinces. The Company continues to focus on improving operating efficiency, which has allowed NSPI to consistently earn an ROE at or near the top of the regulator approved range despite non-fuel electricity rates remaining flat over the rate stability period. DBRS expects this trend to continue in 2018 and 2019. The Province’s carbon cap-and-trade program is poised to take effect from January 2019. The program has an initial compliance period of four years with NSPI having been granted carbon dioxide allowances of 22 million tonnes through the period. The Company’s emission levels are expected to decline through the compliance period as renewable energy will form a materially larger part of its generation mix when the Muskrat Falls project starts producing full power (expected in early 2020). NSPI expects to recover prudently incurred costs associated with the program through the regulatory framework.

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 with domestic peers, particularly related to its fuel cost recovery mechanism. 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 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.

The Company is expected to generate adequate operating cash flow to meet its capital expenditure program over the next two years. NSPI has demonstrated flexible dividend payout policy to its parent company, Emera Inc., in order to maintain its debt-to-capital ratio within regulatory parameters and DBRS expects the Company to continue to do the same. As such, DBRS will continue to view the Company on a stand-alone basis.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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 & Criteria.

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.

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.

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.