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). DBRS Morningstar also confirmed NSPI’s Commercial Paper rating at R-1 (low). All trends are Stable. The ratings of NSPI are based on its regulated electricity distribution, transmission, and generation business, which operate under a reasonable regulatory framework by the Nova Scotia Utility and Review Board (NSUARB). The Stable trends reflect the Company's key credit metrics, which DBRS Morningstar expects to remain supportive of the current ratings.

There were no material changes to NSPI's regulatory framework in 2020. The Company continues to be regulated by the NSUARB under cost of service where it can recover all prudent expenditures and have the opportunity to earn a reasonable return on equity of 8.75% to 9.25%. In December 2019, the NSUARB approved NSPI's 2020 to 2022 fuel stability plan for average annual fuel rate increases of 1.5%. DBRS Morningstar considers it negative that while the Company can pass through all fuel purchase costs through a fuel adjustment mechanism, any undercollection or overcollection will not be recovered until after 2022, leading to higher regulatory lag. In December 2019, the Government of Canada and the Province of Nova Scotia renewed the Canada-Nova Scotia Equivalency Agreement, which will allow NSPI to achieve compliance with federal emission regulations through 2029 by complying with provincial regulations. DBRS Morningstar notes that a long-term challenge for the Company will be its transition from reliance on coal-based generation (50% of 2019 installed generation capacity) to lower-emitting sources. This is expected to be achieved through increasing contributions from renewable energy, including from the Muskrat Falls Project.

NSPI's key credit metrics have been supportive of the current A (low) rating. DBRS Morningstar does not expect the ongoing Coronavirus Disease (COVID-19) pandemic to have a material impact on the Company's results. While industrial and commercial usage have decreased, this has been largely offset by higher residential usage. Additionally, NSPI has also noted that it has not experienced any significant customer defaults and allowances for credit losses. Overall, DBRS Morningstar expects the Company to continue to maintain its key credit metrics in line with the current rating category through prudent dividend and debt management. 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. DBRS Morningstar considers a positive rating action as unlikely in the medium term given the current regulatory framework. A negative rating action is also unlikely but could occur if the metrics weaken to a level no longer commensurate with the current rating category.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (October 27, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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