US credit rating agency S&P Global Ratings has dropped Nova Scotia Power’s rating two levels, from BBB+ to BBB-, because of the provincial government’s Bill 212 to override the Nova Scotia Utility and Review Board process and limit NSP’s non-fuel rate increases to 1.8 per hundred between now and 2024.
“We view this development as political intervention that will materially undermine the NSUARB’s regulatory construct and significantly increase NSPI’s stand-alone business risk,” S&P said in announcing the drop this week.
It also lowered its Canadian-scale commercial paper rating on the company to A-3 (Cdn) from A-1 (Low).
“The negative outlooks on Emera and its subsidiaries reflect the company’s increased business risk, which incorporates the material weakening in its subsidiary NSPI’s stand-alone credit profile,” S&P said in its analysis.
“Additionally, Emera’s consolidated financial measures will only provide it with a minimal financial cushion relative to our downgrade threshold for the current rating. . . . We expect that the company will take steps over the next 12 months to decrease its business risk and improve its financial measures such that they remain consistently above our downgrade threshold.”
S&P also revised its assessment of Nova Scotia’s regulatory jurisdiction to its lowest level.
“The credit quality of the utility industry is predicated on its regulatory stability and the consistency of the regulatory framework. We view the enactment of Bill 212 as political interference because it will undermine the regulatory construct, materially weakening the regulatory jurisdiction’s predictability, and increase the uncertainty for its utilities and stakeholders.”
The agency also said that it sees the political interference “as breaching the regulator’s independence because it will limit the NSUARB’s ability to protect the credit quality of its utilities. We view regulatory independence as one of the key attributes that underpins the credit quality of the utility industry.”
Emera’s chief financial officer, Greg Blunden, said it’s not surprising that S&P is taking a bearish view on the credit quality of NSP.
“They place a high degree of reliance on having a stable, independent regulatory environment. That’s what’s important to investors in our sector,” Blunden said.
“Obviously, they’re really concerned abut the unprecedented interference in the regulatory process by the government through the enaction of Bill 212.”
Blunden said that as far as he knows, NSP has never been rated so low since it was privatized in the early 1990s.
Nova Scotia Power was actually dropped three levels to non-investment grade as a standalone business, but because Emera as the parent company is stronger, it only went down two.
“What it really means for us is that every time we go to the market to issue long-term debt to fixed-income investors, it’s going to come at a significantly higher cost than it otherwise would,” Blunden said.
“And unfortunately that incremental cost we’re going to experience each and every year going forward, over a very short period of time, is going to far outweigh any benefits customers saw from Bill 212.”
He said that if S&P downgrades NSP again to non-investment grade, there would be a risk the utility could not raise funds at all.
“I don’t think they will, but the fact that they still have us on negative outlook is concerning,” Blunden said.
“I am nervous that any additional interference could result in that.”
He said being on the edge of going to a non-investment grade as a regulated utility “is unprecedented in Canada. We’re going to do everything we can do to prevent further downgrade, but it’s not a comfortable spot to be put in. It’s going to increase costs for customers over time and challenge our ability to execute on some of the decarbonization initiatives and greening of the fleet that we want to do.”