DBRS Confirms Emera Inc. at BBB (high), Stable Trend

DBRS has today confirmed the ratings of Emera Inc.’s (Emera’s or the Company’s) Medium-Term Notes and Preferred Shares – Cumulative at BBB (high) and Pfd-3 (high), respectively, with Stable trends, based on the strong earnings and cash flows generated by Nova Scotia Power Inc. (NSPI), Bangor Hydro-Electric Company (BHE) and a number of other utility or contract-based investments and on Emera’s strong, reasonable non-consolidated financial profile. The ratings are also underpinned by the modest diversification through the ownership of regulated utilities in different jurisdictions, which reduces dependence on earnings and cash flows from any one entity and reduces volatility of earnings.

Capex of $600 million is expected at NSPI in 2010 ($345 million spent year-to-date) and will remain at elevated levels over the next few years as NSPI embarks on a significant capital plan to increase its generation from renewable sources, improve transmission connections within services territories and expand access to natural gas. During this period, weaker credit metrics are expected as a result of the lag occurring between when projects commence, when they are completed and when they start to generate cash flow. DBRS expects the credit metrics to recover over the medium term.

Although the Province of Nova Scotia and Maine are mature electricity markets, with expected annual growth of approximately 1%, opportunity exists for organic growth within NSPI and BHE over the next five years as new investments are made in renewable generation and transmission. DBRS expects that Emera will continue to grow its business with opportunistic acquisitions and development of transmission and low-risk generation projects appropriate to its risk profile in the United States and the Caribbean.

In 2009, Emera's $500 million Brunswick Pipeline (Brunswick) entered service, adding additional modest diversity to its earnings. Brunswick is a 145-kilometre natural gas pipeline operating under a 25-year service agreement with Repsol Energy Canada. In the long term, Emera’s aim is to eventually have 35% of its earnings coming from investments other than NSPI. In line with that strategy, it acquired a 38% interest in Light & Power Holdings Ltd., the parent company of Barbados Light & Power Company Limited, for $85 million in May 2010. Emera continues to execute its strategy of investing in regulated utilities in the Caribbean by leveraging its operational strength; DBRS remains comfortable with the Company’s strategy at this time. Emera also has a proposed strategic partnership with Algonquin Power & Utilities Corp. (APUC), where it is conditionally committed to acquiring 9.9% of APUC. As a first step in the partnership, Emera and APUC have committed to acquire the California-based electricity distribution and related generation assets of Sierra Pacific Power Company from NV Energy for US$116 million. The transaction is subject to approval by the Public Utilities Commission of Nevada and is expected to close before December 31, 2010.

Emera also announced that BHE has entered into a merger agreement with Maine & Maritimes Corporation (MAM), under which it will purchase the outstanding shares of MAM’s common stock for between $85 million and $90 million. The merger has received approval from the Maine Public Utilities Commission, but it is still awaiting the U.S. Federal Energy Regulatory Commission approval.

Emera and NSPI recently announced that an agreement has been concluded with Nalcor Energy (Nalcor) to bring energy from the proposed lower Churchill River hydroelectric 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 will 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.

As the Company embarks on its growth plan, DBRS expects that consolidated debt-to-capital will remain stable at or below 65% in the medium term and that consolidated and non-consolidated credit metrics will remain adequate for the current rating. Emera and its subsidiaries continue to have sufficient liquidity to fund their operations, with a total of more than $1.2 billion in operating and acquisition credit facilities.

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.