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

DBRS has today confirmed the ratings of Nova Scotia Power Inc.’s (NSPI’s or the Company’s) Unsecured Debentures & Medium-Term Notes, Commercial Paper and Cumulative Preferred Shares at A (low), R-1 (low) and Pfd-2 (low), respectively, all with Stable trends. The ratings reflect the strong regulated cash flows generated by the Company’s regulated monopolistic operations, diverse customer base and a more supportive regulatory environment. The Company continues to generate strong earnings and the implementation of the fuel adjustment mechanism (FAM) at the beginning of 2009 is expected to reduce earnings volatility in the longer term.

Even though NSPI’s market remains mature, with expected annual growth of approximately 1% over the medium to long term, growth is likely to occur as new investments are made in renewable generation and transmission. The Company is expected to spend more than $1.0 billion in addition to maintenance capital expenditures over the next few years on transmission and a mix of renewable generation opportunities to meet the renewable targets set by the Province of Nova Scotia. Growth capex is expected to account for approximately 50% to 70% (DBRS estimate) of total capex ($345 million year-to-date 2010 and approximately $400 million annually) as the Company invests in its transmission and distribution systems to meet its ongoing load requirements, improve system reliability and comply with new environmental standards.

It is expected that these projects will be funded with cash flow from operations, some debt issuance and management of NSPI’s dividends to Emera Inc. (Emera), which wholly owns the Company. Dividends will continue to be paid to Emera such that NSPI’s equity in the capital structure is maintained at or below the approved level of 40%. During this period, investment in growth projects and the lag occurring between when projects commence, when they are completed and when they start to generate cash flow are expected to weaken NSPI’s credit metrics, although its metrics continue to adequately reflect the current ratings. Each project must receive approval from the Nova Scotia Utility and Review Board (UARB) before NSPI can proceed to ensure that the investment will be included in the rate base. We expect the Company’s metrics to recover over the medium term as projects are included in rate base.

Emera and NSPI also recently announced that an agreement has been concluded with Nalcor Energy (Nalcor), to bring energy from the proposed lower Churchill River hydrolelectric generation project in Labrador to the Province of Newfoundland and Labrador, the Maritime provinces and the New England states. Under the proposed agreement, Nalcor will build generating facilities at Muskrat Falls in Labrador. Emera and Nalcor will jointly develop a new regulated transmission utility in the Province of Newfoundland and Labrador that will be 71% owned by Nalcor and 29% owned by Emera to enable the movement of lower Churchill energy. Emera will invest $600 million in the transmission link between the island of Newfoundland and Labrador out of the total cost of $2.1 billion. In addition, NSPI will own and fund 100% of the subsea transmission link (the Maritime Link) between the island of Newfoundland and Nova Scotia at a cost of $1.2 billion. In exchange for its Maritime Link investment, NSPI will be entitled to 20% of the output of the Muskrat Falls facilities and will be responsible for 20% of the operating costs of the entire project for 35 years.

The project is not yet certain as final agreement is subject to a number of conditions, including final approval of the boards of directors of Nalcor and Emera and by regulators in both provinces. While the investments are considered significant, the project is expected to help NSPI reduce its greenhouse gas emissions and meet the renewable targets set by the Province of Nova Scotia for 2020. Emera has also stated that the project will be funded with a combination of debt and equity in such a way that its capital structure will remain at 60% debt and 40% equity.

DBRS would assess the impact of any final agreement on both Emera’s and NSPI's credit profiles when there is more certainty that the project will proceed and when more details are known. In general, DBRS would not expect any impact on Emera’s and NSPI’s ratings based on the following assumptions: (1) expenditures for both Emera and NSPI would be spread out over a number of years (with the majority potentially spent in the 2013-to-2016 time frame), reducing funding pressure; (2) there will be no material change from the current capital structures; (3) construction risk will be properly mitigated; (4) both investments would be rate-regulated, with the level of business risk being consistent with Emera’s and NSPI’s current business risk profiles; and (5) full regulatory approvals will be received before proceeding.

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

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas and Pipelines), which can be found on our website under Methodologies.