DBRS Comments on the Maritime Link Decision

DBRS notes that on July 22, 2013, Emera Inc. (Emera; rated BBB (high)) received the Nova Scotia Utility and Review Board’s (UARB) decision on its Maritime Link Project (the Maritime Link or the Project). The UARB conditionally approved the Maritime Link, on the premise that the project obtains from Nalcor Energy (or through another arrangement) the right to access market-priced energy (surplus energy) when needed to economically serve Nova Scotia’s ratepayers (the Condition). If the Condition is met and the Project is completed on time with no material unapproved cost overruns, DBRS views the Maritime Link as a modest credit positive. However, under a worst-case scenario, Emera’s ratings could be pressured if the Condition is not met and the Maritime Link is still built, on a non-regulated basis.

Emera’s credit quality is expected to modestly improve upon the successful completion of the Maritime Link as planned (as a regulated entity). The Project would likely grow Emera’s regulated earnings and cash flows over the long term, contributing to cash flow stability. However, in its conditional approval, the UARB imposed the Condition, as it is concerned that the opportunity to purchase market-priced energy may not be available when needed. As a result, this creates some uncertainties regarding the viability of the Project as planned.

Under a worst-case scenario, if an agreement for the access of market-priced energy with Nalcor Energy (or another willing entity) is not reached, Emera may continue with the construction of the Maritime Link, or a variation of the Project, on a non-regulated, merchant basis. This scenario would likely have a negative impact on Emera’s business risk profile. DBRS notes that the construction of the Maritime Link on a non-regulated basis could pressure Emera’s rating, given the significance of the Project to Emera, unless the majority of the capital requirement from Emera is funded with equity. On a pro forma basis, the Maritime Link accounts for over 15% of Emera’s total assets.

The Maritime Link is a 500-megawatt (MW) capacity transmission line connecting the transmission grids of Newfoundland and Labrador to Nova Scotia across the Cabot Strait. In exchange for 20% of the electricity from Muskrat Falls over 35 years, NSP Maritime Link Incorporated, an indirect, wholly owned subsidiary of Emera, is responsible for 20% of the Lower Churchill Phase 1 projects and Maritime Link facilities costs. Emera’s share of the project is estimated to cost between approximately $1.52 billion and $1.58 billion.

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

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry (May 2011), which can be found on our website under Methodologies.