Emera Inc. $20 – Toronto symbol EMA

EMERA INC. $20 (Toronto symbol EMA; Income Portfolio, Utilities sector; SI Rating: Average) is the main supplier of electrical power in Nova Scotia, and Bangor, Maine.

Emera’s high market share and largely regulated operations give it plenty of steady cash flow to increase dividends (its current dividend of $0.89 a share yields 4.5%) and fund new projects.

For example, Emera recently agreed to build a $350 million pipeline that would transport natural gas from a proposed liquefied natural gas (LNG) terminal near Saint John, N.B. to the U.S. portion of the Maritimes & Northeast Pipeline in Maine. (Emera owns 12.9% of the Maritimes & Northeast pipeline.)

Natural gas prices have moved down in the past few months. But the long-term potential for LNG is strong, particularly as production at many of North America’s conventional gas fields begins to fall. Emera has signed a 25-year contract with the LNG terminal’s owners, which helps cut the project’s risk.

This a major commitment for Emera, which earned $0.26 a share (total $29.2 million) in the three months ended June 30, 2006. That’s a 44.4% gain over the $0.18 a share ($19.3 million) it earned in the year-earlier quarter.

Most of the higher profit came from lower fuel costs, and gains on the sale of excess natural gas. Revenue fell 1.5%, to $275.9 million from $280.1 million, due to the temporary shutdown of a large industrial customer.

Emera has just $26.4 million ($0.24 a share) in cash, so it will have to borrow the money it needs to build the new pipeline. It also plans to issue more stock. This combination will likely keep Emera’s debt-to-equity ratio near its current level of 1.2.

The stock now trades at 17.2 times its estimated 2006 earnings of $1.16 a share, and at just 7.5 times its cash flow forecast of $2.65 a share.

Emera is a buy.

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