DBRS Morningstar Confirms Ratings on Nova Scotia Power Inc. at A (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Nova Scotia Power Inc.’s (NSPI or the Company) Issuer Rating and Unsecured Debentures & Medium-Term Notes rating at A (low) as well as its Commercial Paper rating at R-1 (low). All trends are Stable. The ratings reflect stable operations in the Company’s regulated utilities in the Province of Nova Scotia (the Province; rated A (high) with a Stable trend by DBRS Morningstar) and robust key credit metrics. The Stable trends reflect DBRS Morningstar’s expectation that NSPI’s key credit metrics will continue to remain supportive of the ratings.

NPSI’s regulatory environment remains relatively unchanged. The Company operates under a reasonable regulatory system that enables it to earn a return on equity (ROE) in the range of 8.75% to 9.25% based on an equity thickness of up to 40.00%. NSPI’s continued focus on improving operating efficiency has allowed it to consistently earn a ROE at or near the top of the regulator-approved range. DBRS Morningstar expects this trend to continue in 2019 and 2020. NSPI’s business risk assessment (BRA) of A (low) considers the Company’s below-average regulatory lag compared with domestic peers, particularly related to its fuel cost-recovery mechanism. NSPI’s BRA also reflects the challenges associated with its high electricity rates, which could make it increasingly challenging to fully pass costs onto the ratepayers in a timely manner if costs rise more quickly than anticipated.

In June 2019, NSPI filed a new three-year fuel stability plan (FSP) requesting an average annual fuel rate increase of 1.9% from 2020 to 2022. The Company expects the Nova Scotia Utility and Review Board’s decision on this matter by year-end (YE) 2019. The Province’s carbon cap-and-trade program took effect on January 1, 2019, with an initial compliance period of four years. NSPI’s emission levels will likely decline through the compliance period as renewable energy will form a materially larger part of its generation mix when the Muskrat Falls project begins producing full power, which is expected in 2020. The Company expects to recover the cost of emission allowances (credits) under the program as part of its FSP. The Province and the Government of Canada (rated AAA with a Stable trend by DBRS Morningstar) are also in the process of renewing the Canada-Nova Scotia Equivalency Agreement (Equivalency Agreement), which will allow NSPI to achieve compliance with federal emission regulations through 2029 by complying with provincial regulations. The Equivalency Agreement will likely be finalized by YE2019.

DBRS Morningstar expects NSPI to generate adequate operating cash flow to meet its capex requirements over the next two years. NSPI has a flexible dividend payout policy to its parent company, Emera Inc., which allows the Company to maintain a debt-to-capital ratio within regulatory parameters. DBRS Morningstar expects the Company to maintain this policy and, as such, DBRS Morningstar will continue to rate NSPI on a stand-alone basis.

Notes:
The principal 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 Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, 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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 Morningstar 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 [email protected].

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