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Morningstar | Emera Management Looks to Asset Sales to Fund Growth Plan

Lured by higher allowed returns and greater growth opportunities, Emera has transitioned from a predominantly Canadian utility to one where a majority of earnings come from U.S. subsidiaries. Management made its boldest move yet in acquiring Teco Energy, paying a healthy premium for a regulated utility in constructive Florida.While Emera's Canadian utilities earn around 9% allowed returns, they typically enjoy lower costs of capital than U.S. counterparts. Forward test years and fuel-adjustment mechanisms keep regulation constructive and allowed returns attainable. Strong results from Emera's unregulated operations resulted in regulated operations accounting for just 65% of earnings in 2015, resulting in management looking to the U.S. to reregulate its earnings profile.In 2017, over 95% of earnings came from regulated operations with Teco Energy in the fold. While we view the $10.4 billion acquisition price, including debt, as expensive, we note that Florida offers above-average load growth, supportive regulation, and natural gas infrastructure investment opportunities.Growth prospects are strong for Emera, particularly at its regulated Florida subsidiary. Similar to its regulated peers in Florida, Teco Energy expects to invest roughly $850 million for 600 megawatts in solar development in the region, with regulators providing automatic solar base rate adjustments upon completion with a 10.25% allowed return on equity. Beyond 2020, management is looking for an additional 600 MW of solar investment, confirming our view that there is a very long runway of solar generation opportunities in a state where less than 1% of total generation came from solar in 2017. The Florida utility also recently announced plans to invest $850 million in the modernization of the Big Bend Power Station.Management recently announced it would sell certain assets to fund 20%-30% of the $6 billion we forecast Emera will need over the next three years. We believe it would be wise for management to focus on divesting its unregulated, no-moat generation unit, which we believe prevents Emera from trading in line with its purely regulated peers.