Emera Incorporated

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Emera Incorporated is a Canadian energy company focused on regulated utilities and other energy infrastructure assets in North America.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Emera’s business primarily revolves around electricity generation, transmission, and distribution, along with natural gas transmission and storage in specific markets. Most of their operations are regulated, making it somewhat similar to a utility.

Business Overview

  • Regulated Utilities: The core of Emera’s business lies in its regulated utilities. These include companies like Nova Scotia Power in Nova Scotia, Emera Maine in Maine, and Emera Caribbean. These assets provide relatively stable, regulated revenues, with allowed rates of return on invested capital.
  • Other Energy Infrastructure: Beyond regulated utilities, Emera also invests in assets, that provide energy transportation and distribution including gas pipelines. Their portfolio is strategically designed to leverage growth and recurring cash flows.
  • Geographic Focus: Emera’s operations are primarily concentrated in North America and the Caribbean. The presence in Canada (Nova Scotia), United States (Maine) and island nations gives them a fairly unique profile and also exposes them to diverse regulatory systems, economic factors, and energy policies.
    • In terms of revenue distribution, Canada contributes the most to overall revenue (56% in 2022), followed by the United States (29%) and Caribbean (15%).

Industry Trends

The energy industry is undergoing a major transformation, and Emera has to adapt to a changing regulatory landscape.

  • Shift Towards Renewables: There is increasing regulatory support and market demand for renewable sources of energy. Emera’s strategy is to transition towards clean energy sources (like wind, solar and hydro), while managing the decline of fossil-fuel based power plants.
  • Smart Grid Investments: As an electricity distributor, Emera must invest in and implement grid modernization technologies (smart meters, advanced control systems, etc.) to improve the reliability of its grids.
  • Energy Efficiency: Policies promoting energy efficiency may cause a reduction in overall energy consumption which may put pressure on volumes.
  • Government Policies: The regulatory and political environment for utilities tends to be complex and is continuously changing.

Competitive Landscape

The nature of competition varies based on their operating regions. They primarily compete against other utilities, independent power producers, and infrastructure companies.

  • In regulated utilities, competition tends to be limited due to the nature of the business, but there are other challenges like negotiating a fair rate of return with regulators.
  • In other infrastructure assets like the gas pipelines, Emera faces direct competition from other mid-stream and energy transportation companies.
  • They can face pressure from municipalities or cooperatives that can provide these services.

Competitive Advantage (Moat)

  • Limited Moat: Emera’s economic moat is rated a 2 out of 5.
    • Regulation: The regulated nature of their utility business forms a narrow moat that stems from the fact that they have limited competition and can maintain stable returns. However, this moat is also its vulnerability. The returns from the business are closely controlled by the regulatory environment and they have to negotiate with regulators to achieve attractive returns.
  • Scale: They have a large infrastructure and customer base in its operating regions, which limits entry by new competitors.
  • Local Knowledge: A long track record in their operating regions and close contact to their customers (utilities, for instance, need strong local knowledge).

Risks to the Moat & Business Resilience

Though a moat exists, they are not unassailable.

  • Regulatory Risks: Adverse regulatory changes could make their operations less profitable or restrict them.
  • Technological Disruption: New, more cost-effective technologies could challenge existing business models. They may have to incur substantial amounts of capital expenditure in short periods to remain competitive.
  • Commodity Risk: Fluctuations in fuel prices may make the profitability of their nonregulated businesses volatile (though, their regulated utilities can pass on higher fuel costs to consumers).
  • Weather Risk: Unpredictable weather events can lead to costly outages. Their assets in the caribbean are exposed to hurricane risk.
  • Rising Interest Rates: High interest rates make borrowing more expensive, which reduces the company’s profitability and makes capital allocation difficult.
  • Debt levels: High debt can pose problems for the company should their cash flows dip.
  • Economic Volatility: The global macro economic climate, like the recent spike in inflation, can hurt the company.
  • Acquisitions: Integrating companies might not be successful or could be more costly than expected.

*Despite these risks, the company appears to have sound business practices to ensure good performance in most market conditions.

Financial Analysis

Emera’s financials exhibit some recurring trends and have some unique aspects that need to be explored in detail. All numbers are in Canadian Dollars unless stated.

  • Revenue
    • The revenue has shown steady growth over the years, but it is significantly impacted by rate-approvals by regulatory bodies and fluctuations in commodity prices (e.g. fuel costs).
    • Total revenue was $8.68 billion in 2022 (a decline of 6% compared to 2021), with the following regional split: Canada ($4.85B), US ($2.49B) and the Caribbeans ($1.34B).
    • Canada was the only region that showed slight growth in 2022 at 1% , United States saw a decrease of 21% and the Carribean decreased by 3% compared to 2021.
    • The revenue has been growing annually around 4 to 5%, with exception of 2022.
  • Profitability
    • EBIT has a wide range (from $1.5B to 1.9B) which is a direct result of operating conditions.
    • The operating margin hovers between 17 to 25% depending on the year.
    • Net income has large variations in its recent past. It has been in as low as $12 million in 2020, to $1.19B in 2021. These are driven by large losses and gains, in those particular years, mostly relating to “gain on deconsolidation of subsidiary” and “impairment of equity investments.”
    • Adjusting for these variations, net income is around $600-800 million a year.
  • Free Cash Flow
    • Free cash flow (FCF) generation has been inconsistent over the past years. They have typically had negative FCF in the past.
    • The most recent estimates show FCF of $902 million for 2022.
    • The company tends to acquire new businesses and expand the existing ones using both debt and equity, making the free cash flow relatively volatile.
  • Capital Structure
    • They have a high amount of debt outstanding on their balance sheet, around $15.3B in 2022.
    • They have a reasonably long weighted-average debt maturity profile, with an average of ~12 years, which should help them meet current obligations.
    • Current debt ratings are BBB-, Baa3 with stable outlook. The company remains committed to a target long term debt-to-equity ratio of approximately 65%.
  • Management’s Outlook:
    • The management is confident that they will be able to transition to renewable energy sources smoothly, while also providing good returns to shareholders. They want to achieve this while maintaining a strong balance sheet.
    • The main priorities for management are improving operating efficiency, expanding into new markets, maintaining the existing business portfolio, and investing in renewable energy.
    • They’re also emphasizing the need for strong financial discipline and capital allocation.

Understandability: 2 / 5

While the business of a regulated utility is relatively easy to understand, Emera is more complicated because of their energy-infrastructure, business model, and operations in diverse markets, including foreign markets. It takes some time to understand how all the moving pieces fit together. It also requires some industry knowledge to understand the details regarding regulatory systems in different jurisdictions.

Balance Sheet Health: 3 / 5

  • Their assets appear to be of reasonably good quality, as they consist of utilities, pipelines, power plants etc.
  • They have high debt levels on their balance sheet, but have a good maturity profile of over 12 years.
  • They have been generating adequate cash flows to serve this debt, and to expand operations. But the variability in those cash flows is a source of concern and contributes to the lower balance sheet health rating.

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