DBRS Confirms Emera Inc. Medium-Term Notes at BBB (high) and Preferred Shares – Cumulative at Pfd-3 (high), Stable Trends

DBRS has today confirmed the Medium-Term Notes and Preferred Shares – Cumulative ratings of Emera Inc. (Emera or the Company) at BBB (high) and Pfd-3 (high), respectively, with Stable trends, based on the strong earnings and cash flows generated by its regulated operations and on Emera’s, reasonable non-consolidated financial profile. The ratings also reflect increasing 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. However, Nova Scotia Power Inc. (NSPI) continues to account for the majority (approximately 70%) of Emera’s consolidated EBIT.

Consolidated capex at Emera remains high and will remain at elevated levels over the next few years due to high capital expenditure at NSPI and investments in other regulated and non-regulated businesses in the Caribbean and United States. In the last twelve months ended September 30, 2011, Emera acquired Maine & Maritimes Corporation, a regulated utility in Maine, for $82 million; increased its investments in Grand Bahama Power Company and Barbados Light & Power Company Limited at purchase prices of $88 million and $92 million, respectively, and acquired a 7.2% equity interest in Algonquin Power & Utilities Corp. (APUC). Emera and APUC have also announced that they will enter into a partnership (Northeast Wind) to jointly construct, own and operate wind energy projects in the U.S. northeast. As such, they intend to form a partnership with First Wind Holdings, which has a 370 megawatt (MW) portfolio of wind energy projects that have been completed or are under construction.

Emera’s total investment in Northeast Wind will be approximately $252 million and the sale is expected to close in early 2012, pending regulatory approvals. Regulated capex is still expected to represent approximately 50% to 70% of Emera’s consolidated capex in the medium term, despite increased investment in non-regulated businesses. Furthermore, DBRS expects that Emera will continue to use its core skills and strengths to increase its portfolio and 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. The Company also aims to eventually reduce its dependence on NSPI by reducing its earnings contribution to approximately 50% over time.

However, during this period, DBRS expects modest pressure on Emera’s credit metrics as a result of the lag occurring between when projects commence, when they are completed and when they start to generate cash flow. All regulated projects, especially those at NSPI, which account for a significant portion of consolidated capex, must receive approval from the regulator before they can proceed, ensuring that investments are included in rate base. DBRS expects that consolidated debt-to-capital will remain stable, at or below 65% in the medium term, and that consolidated credit metrics and non-consolidated metrics will remain adequate for the current rating.

DBRS continues to monitor the longer-term development and impact of the proposed Maritime Link project, a subsea transmission link from Newfoundland to Nova Scotia, which is 100% owned by Emera, and Emera’s 29% interest in the transmission link (Labrador Island link) between the island of Newfoundland and Labrador. The Maritime Link project is estimated to cost $1.2 billion; with an in-service date of late 2016, construction is expected to start in 2014. It is expected that the investment would be spread over the 2013 to 2016 time frame and would receive full regulatory approvals before proceeding. Emera is currently exploring various ownership structures for the Maritime Link project, including having the project in NSPI’s rate base. In exchange for its Maritime Link investment, Emera will be entitled to 20% of the output (this amount of power represents approximately 8% to 10% of Nova Scotia’s domestic needs) of the 824 MW Muskrat Falls facilities and will be responsible for 20% of the operating costs of the entire project for 35 years. Emera’s investment of $610 million in the Labrador Island link, to be developed jointly with Nalcor Energy (Nalcor), is expected to be funded through a combination of equity and debt in such a way that its capital structure remains stable.

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 investment 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. DBRS expects the full regulatory approvals will be received before proceeding and the project will be funded in line with its current capital structure.

Emera and its subsidiaries continue to have sufficient liquidity to fund their operations, with a total of more than $1.3 billion in operating and acquisition credit facilities.

Note:
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.