In less than two months, the largest acquisition by Halifax-based Emera Inc. — a US$10.4 billion transaction to purchase TECO Energy, a regulated utility with operations in New Mexico and Florida — is expected to close.
The acquisition, announced last September will be transformative: it will vault the company into the ranks of the Top 20 regulated utilities in North America and means Canada will contribute a mere 25 per cent of its earnings.
Prior to this, Emera, which held its annual meeting in Toronto on Tuesday, generated 49 per cent of its earnings from Canada. Accordingly, Emera is far removed from the former Nova Scotia Power privatized by the provincial government in late 1998.
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And it’s more than likely that Canada will contribute a smaller percentage of earnings in the future. For starters, most of the possible targets in Canada are government-owned. But it’s part of Emera’s strategy to grow south of the border.
“There is an over-arching approach to be focused on clean energy,” said Chris Huskilson, chief executive. “Our objective is to find places where there is opportunity to reduce the carbon intensity of the generation system.” To do that, investments will be made in renewables, transmission and gas.
“TECO Energy fits all those things,” said Huskilson, adding the company is also attractive because it operates in a “very regulated business,” and Emera was slowly becoming less regulated.
When TECO comes on board, Emera’s regulated business will comprise almost 84 per cent of its earnings — compared with 72 per cent at present.
“It’s a combination of it fitting our strategy from a more regulated businesses [perspective] and because we will be working in New Mexico and Florida on reducing carbon intensity. Those two things provide tremendous opportunity,” noted Huskilson, an employee since 1980 and chief executive since 2004.
That combination has impressed investors: since the acquisition was announced, Emera’s shares have generated a total return of 7.13 per cent – compared with a 4.83 per cent the S&P/TSX composite. The return on the instalment receipts, issued at the announcement of the acquisition, and which offer a leveraged play, have been higher.
Indeed the goal of a larger percentage of earnings coming from regulated operations is part of a perfect circle. “Our shareholders like investing in regulated businesses. If we drift away our shareholders are less comfortable with where we are,” said Huskilson.
“That’s why we have set such a firm target [of 75 per cent to 85 per cent] and [besides] they have been good businesses over decades,” he said, adding New Mexico and Florida provide “constructive regulatory environments.” In that context, constructive means “the regulators work with the companies to come to the best outcome for customers and keep the companies healthy financially.”
In the two U.S. states where TECO operates (and Emera won the acquisition by bidding US$60 million more than the runner-up) natural gas will replace coal, while solar power emerge as a growing sector. “New Mexico will be a new area for us to invest,” noted Huskilson, adding it takes “a strong company that’s serving its customers well to be able to make those investments.”
According to Bloomberg, Emera is followed by 10 analysts, five of whom rate it a buy, four a hold and one a sell. The target prices range from $48-$56. The shares closed Wednesday at $45.70. Emera, which currently pays $0.475 a share per quarter, plans to grow its dividend at eight per cent a year.