DBRS Morningstar Confirms Credit Ratings on Nova Scotia Power Inc. at BBB (high) and R-2 (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Unsecured Debentures & Medium-Term Notes rating of Nova Scotia Power Inc. (NSPI or the Company) at BBB (high), and its Commercial Paper (CP) rating at R-2 (high). All trends are Stable. The credit ratings of NSPI are based on the Company's regulated integrated electricity operations under the Nova Scotia Utility and Review Board (NSUARB). The Stable trends reflect NSPI's key credit metrics, which have weakened following the Province of Nova Scotia's (the Province; rated A (high) with a Stable trend by DBRS Morningstar) intervention in the most recent General Rate Application (GRA) process, but are supportive of the BBB credit rating category.

In February 2023, the NSUARB approved most of NSPI's negotiated settlement for the 2022 to 2024 GRA as submitted. The NSUARB approved, among others, (a) a 1.8% increase in nonfuel rates effective February 2, 2023, (b) a 5.1% and 6.9% increase in rates for fuel and demand-side management costs for 2023 and 2024, respectively, and (c) a new storm rider effective for each of 2023, 2024, and 2025. DBRS Morningstar is encouraged that the NSUARB approval of the negotiated settlement did not face further political interference from the Province, but considers regulatory interference to still be a heightened concern.

DBRS Morningstar notes that in October 2023, the Province published its 2030 Clean Power Plan. The plan calls for the addition of new wind, solar, and natural gas capacity to the grid, as well as battery storage, and a new transmission line to New Brunswick to improve reliability of the grid. The Province also confirmed that it would not be feasible to complete the Atlantic Loop in time to meet its mandated deadline of 80% renewable power and to phase out coal-fired generation plants (51% of NSPI's 2022 generation capacity) by 2030. DBRS Morningstar is encouraged that there is now a plan for NSPI to achieve its provincially mandated renewable generation targets, and there is alignment with the Province that substantial capital expenditures (capex) will be required. However, DBRS Morningstar expects these plans will require substantial funding support from both the Provincial and Federal governments under an ambitious time frame. DBRS Morningstar will continue to monitor the Company's progress, especially with the release of a Clean Electricity Solutions Task Force report expected early in 2024.

DBRS Morningstar had noted in its most recent review of NSPI that the Company's earnings and key credit metrics would likely weaken because of the rate cap under Bill 212, which amended the Public Utilities Act. As expected, NSPI's key credit metrics were pressured in 2022 and the last 12 months ending September 30, 2023, but are supportive of the current credit rating category. DBRS Morningstar expects the Company to remain prudent in managing its capex and dividends in order to maintain key credit metrics in line with the BBB credit rating range. NSPI's parent company, Emera Inc., has historically been supportive of the Company by maintaining a flexible dividend payout policy (none paid in 2023) and providing equity injections ($125 million received as of September 30, 2023) to maintain leverage in line with the regulatory capital structure of 37.5% equity.

DBRS Morningstar also notes that NSPI has increased the limit on its CP program to $800 million from $500 million. The Company's CP program is backstopped by an $800 million committed revolving credit facility maturing in December 2027 (the Credit Facility). Based on its review, DBRS Morningstar is satisfied that NSPI's revised CP program limit and the Credit Facility continue to meet DBRS Morningstar’s requirements with respect to the “DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers.” DBRS Morningstar is of the view that the increase in NSPI's CP program limit has no impact on the credit profile of the Company.

A negative credit rating action could occur if there is further political interference in the regulatory process for NSPI, or if key credit metrics weaken to a level no longer supportive of the current credit ratings (i.e. cash flow-to-debt remaining below 10% for a sustained period of time). A positive credit rating action is unlikely in the medium term as DBRS Morningstar would need to see (1) the regulatory process for the next GRA conducted free of any interference and with the NSUARB's full independence on the determination of rates, (2) meaningful progress for the Company within its role under the Province's 2030 Clean Power Plan, and (3) key credit metrics return to be in line with the "A" credit rating category.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Carbon and GHG costs had a relevant effect on the credit analysis of NSPI. DBRS Morningstar considers the Company's transition from reliance on coal-based generation (51% of 2023 installed generation capacity) to lower-emitting sources to be a challenge, as coal-fired generation is mandated to be phased out, and 80% of electricity sales are to be from renewable sources by 2030. The Province published its 2030 Clean Power Plan in October 2023, which outlined how it will achieve its targets within the deadlines. However, significant investments will be needed by NSPI, including substantial funding support from both the Provincial and Federal governments.

There were no Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (https://www.dbrsmorningstar.com/research/421106/global-methodology-for-rating-companies-in-the-regulated-electric-natural-gas-and-water-utilities-industry; September 27, 2023).

The following methodology has also been applied:
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (https://www.dbrsmorningstar.com/research/410196/dbrs-morningstar-global-criteria-commercial-paper-liquidity-support-for-nonbank-issuers; February 24, 2023).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577