Topic: Dividend Stocks

Canadian utility’s profits and dividends powered by acquisitions

September 25, 2017|by Scott Clayton

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This Maritime utility is counting on a big new hydro project in Labrador to replace some of its older coal and gas-fired plants in Nova Scotia with low-cost, clean hydroelectric power. The company’s recent purchase of U.S. power and gas distributor Teco should also pay off for years to come.

With acquisitions, hidden problems with new operations can offset the expected profit gains. However, Teco’s regulated operations are already profitable, and the additional cash flow will let Emera keep raising its dividend. The company has also been able to respond quickly and effectively to the power outages caused by Hurricane Irma.

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EMERA INC. (Toronto symbol EMA; www.emera.com) owns 100% of Nova Scotia Power— that province’s main electricity supplier. This business supplies 20% of Emera’s earnings. It also owns power utilities in the U.S. and the Caribbean.

On July 1, 2016, Emera completed its biggest acquisition to date—its $13.9 purchase of Teco Energy. That firm supplies electricity and natural gas to 1.05 million customers in Tampa Bay, Florida. Another of its businesses distributes gas to 510,000 customers in New Mexico.

With Teco, Emera’s revenue in 2016 rose 53.3%, to $4.3 billion. Excluding the costs to integrate that firm, the company earned $475.0 million, or $2.77 a share.

As a result of the Teco purchase, the company now gets 62% of its earnings from the U.S., followed by Canada (30%) and the Caribbean (4%). The remaining 4% comes from energy trading and other operations.

Two weeks ago, Emera sent technicians and other employees from Nova Scotia Power to Tampa to help repair the damage caused by Hurricane Irma. Last week, the company reported that power had been restored to 99% of its customers. The hurricane also caused minor damage to Emera’s 82%-owned power utility on Grand Bahama Island, which has 18,800 customers.

The company has yet to reveal how much it expects these repairs will cost. However, they should have little impact on its 2017 earnings.

In the past few years, the company has steadily expanded into other regions through acquisitions. It now owns or invests in several power plants and natural gas pipelines in the U.S. and the Caribbean.

Thanks to those new businesses, Emera’s revenue rose 42.8%, from $2.1 billion in 2012 to $2.9 billion in 2014. It then fell to $2.8 billion in 2015 due to lower revenue from the company’s electricity-trading business.

Excluding unusual items, earnings jumped 43.2%, from $230.5 million in 2012 to $330.0 million in 2015. Due to more shares outstanding, per-share earnings rose at a slower rate of 22.2%, from $1.85 to $2.26.

In addition to acquisitions, Emera continues to build new projects. Those include the $600 million Labrador Island Link. It will transmit power from a new hydroelectric facility at Muskrat Falls, Labrador, to the island of Newfoundland. The company owns 59% of this project, while Nalcor (Newfoundland’s government-owned power company) owns the remaining 41%.

Dividend Stocks: Maritime Link is underway, Atlantic Link undecided

Emera also continues to work on its 100%-owned Maritime Link project. It will use an undersea cable to transmit electricity from the province of Newfoundland & Labrador to Nova Scotia. The company will spend $1.6 billion.

Both of these projects should start up in 2018. That will help Emera comply with Nova Scotia’s plan to phase-out its coal-fired power plants by 2030.
This year, the company is also spending $715 million U.S. on projects associated with its new Teco operations, such as new solar-power facilities in Florida and upgrades to gas distribution systems in both Florida and New Mexico.

Separately, the company has yet to decide whether to go ahead with the Atlantic Link. That underwater cable would transmit power from wind farms and hydro facilities in New Brunswick and Maine to Massachusetts. The project would cost $2 billion U.S., and Emera would have to spend another $2 billion U.S. on new wind-power generators.

Based on the strong response the project has already received from potential customers, the company will probably submit a formal bid later this year. If approved, Atlantic Link could begin operating by the end of 2022.

In all, Emera plans to spend a total of $6.5 billion between 2017 and 2020 on new projects and upgrades to its current operations.

Those are big outlays for the company, which held cash of just $217 million as of June 30, 2017. As well, Emera’s long-term debt jumped after the Teco purchase to $13.4 billion, or a high 136% of its market cap.

However, regulators will let the company pass along most of these expenses to its customers through rate increases. Regulated operations now supply 90% of Emera’s earnings, and their steady cash flows provide plenty of funds to repay loans as they come due.

The company’s focus on regulated activities will also help it meet the goal of raising its annual dividend rate by 8% each year through 2020. The current rate of $2.09 a share yields a high 4.3%.

Emera aims to pay out 70% to 75% of its annual earnings before unusual items as dividends. In 2016, dividend spending fell just short of that target at 68.2%.
The stock trades at 17.9 times the $2.74 a share the company will probably earn in 2017. Earnings could rise to $3.08 a share in 2018 as Emera realizes more of the benefits of the Teco purchase. The stock trades at just 15.1 times that forecast.

Recommendation in The Successful Investor: Emera is a buy.

For our recent report on a Canadian financial stock that is growing by acquisition, read Dividends and acquisitions both increasing for Canadian insurance giant.

For our views on a another way to improve your returns, read Stock buybacks can be just as good as dividends for investors.