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Morningstar | Emera Wisely Sells No-Moat Northeast Generation Assets

We are reaffirming our CAD 46 fair value estimate and narrow moat and stable moat trend ratings for Emera after the company announced an agreement to sell 1,100 megawatts of Northeast generation facilities for $590 million.

The sale of Bridgeport Energy, Tiverton Power, and Rumford Power to the Carlyle Group exits Emera from the merchant power business. The sale price of $516 per kilowatt is in line with what Emera paid for the assets five years ago and consistent with our valuation. Management recently announced it would look to sell assets to fund 20%-30% of its $6 billion capital plan, and we reasoned then that it would sell its unregulated, no-moat generation unit first. We believed this is one reason that Emera trades at a discount to its peers. While the assets performed well this year, the unit is susceptible to volatile commodity prices and capacity prices, creating cash flow uncertainty, which utility investors tend to view unfavorably.

Management noted that its Florida assets--Tampa Electric and Peoples Gas--and Nova Scotia Power would not be divested as part of its announced plan. This leaves $600 million-$1.2 billion in funding needs remaining from asset sales. New Mexico Gas and Emera Caribbean have rate bases of approximately $0.6 billion each, and we think a divestiture of either asset would meet the requirements. Emera Maine, with $0.7 billion in rate base, also seems like a potential candidate, in our opinion.

We continue to view the asset divestitures positively. We like the focus of capital growth investments in highly constructive Florida. These investments and smaller opportunities across the other operating units should drive 6% rate base growth through our five-year outlook.