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George Fisher
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  • Emera Inc: Underfollowed Canadian Utility with Shareholder Friendly Management  0 comments
    Mar 30, 2011 6:06 PM | about stocks: EMRAF, AQUNF, NVE, NGG
    Emera Inc (EMRAF.PK, EMA.TO) is a Canadian-based electric utility on the move. Its main regulated subsidiary is Nova Scotia Power (NSPI). EMA has been expanding in the US through acquisitions and joint ventures, along with expanding in the Caribbean. Like all good Canadian utilities, Emera is moving towards the minimum 25% of power generated through alternative power sources by 2015 and 40% by 2020. EMA has $6.3 billion in assets (all numbers will be in Canadian $)
     
    NSPI comprises about 66% of 2010 operating income with the balance from regulated utility Bangor Hydro in Maine, Caribbean-based Grand Bahamas Power (80% ownership) and Barbados Power (80% ownership), transmission construction services, and a natural gas pipeline. 
     
    Emera recently completed a secondary stock offering to assist in improving its balance sheet after an active 2010. In Dec, EMA purchased Maine and Maritime, a Maine-based transmission company. In addition, EMA established a joint venture with Algonquin Power (AQUNF.PK, AQN.TO) that purchased California transmission assets from Sierra Pacific Power (NVE).  Last year, EMA increased ownership in both of its Caribbean utilities. Emera is making headway with several alternative energy projects involving biomass, wind and hydro. These growth initiatives call for investments of upwards of $4 to $5 billion through 2016.  
     
    Emera has an interesting relationship with Algonquin Power. Not only are they joint venture partners, but EMA has become a major shareholder in Algonquin. As part of the California acquisition, Algonquin offered EMA the opportunity to buy into the company to the tune of 8% of shares outstanding. In addition, EMA has the right to buy another 12% upon completion of Algonquin’s previously announced acquisition of Granite State Electric and Energy North Natural Gas from National Grid (NGG). 
     
    The partnering of Algonquin and EMA is an interesting marriage. Algonquin has historically been a wind and hydro-electric merchant power producer, and its potential acquisition by EMA down the road would assist in achieving government-mandated renewable energy requirements.
     
    EMA has a market capitalization of $3.6 billion, has about 120 million shares outstanding, and carries net debt of about $3.4 billion. The current dividend yield is an acceptable 4.2%, after the dividend was increased by 15% in November of last year.  Management has increased the dividend 4 times during the past 3 years. 
     
    Management is very shareholder friendly as demonstrated by the average 5-yr dividend growth of 10.8%. However, the payout ratio is a bit high at a current 76%. Return on invested capital (ROIC) has a 5-yr average of 3.8%, with a 2010 ROIC of 4.4%, a bit below the average utility of around 6% to 7%. After Emera was appointed a place on the board of directors of Algonquin in 2010, they raised their dividend as well.
     
    EMA generated record earnings per share in 2010 of $1.68, up from $1.56 in 2009. Including the added shares from the recent secondary offering, eps are anticipated to be $1.70 this year and $1.83 next.  Cash flow from operations in 2010 was $416 million, up 34% from $310 million reported in 2009. The increase is attributed to stronger operating results.
     
    Electric utility investors should review Emera. While not particularly undervalued at its current share price of $31, conservatively managed EMA offers a steady utility investment with growth prospects for both earnings and dividends. I was a shareholder from 2003 to 2007 and am giving serious consideration to jumping back in.

    As Emera is a Canadian company, buying on the Toronto Exchange is preferred due to liquidity.  However, if investors are unable to do so, Emera does trade on the US Pink Sheets, like many foreign-listed companies.  However, due to low trading volume, limit orders should be used.  Entering and exiting using multiple limit orders should not be a problem for long-term investors. 


    Three year chart comparing the outperformance of EMA vs the S&P Utility ETF (XLE) is below:

     
     
    As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation. 


    Disclosure: I am long OTCQB:AQUNF.

    Additional disclosure: I have been a shareholer since 2009
    Themes: Long, Utilities Stocks: EMRAF, AQUNF, NVE, NGG
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