Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.

Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Monday, December 2, 2013

Emera's Poison Chalice

The day Nova Scotia's Utility and Review Board (known as the URAB) handed down the best decision Emera could hope for on the Maritime Link, the Nova Scotia government handed them a grenade. Just as was the case when: Danny Williams announced the Muskrat Falls project, and on the same day North East Utilites of the US announced it was building a billion dollar power line from Quebec to the eastern US; and just like the day of the original URAB decision that granted conditional approval of the Maritime link, and on the same day Hydro-Quebec announced it was filing suit against CFLCo/Nalcor over illegally taking power from the Upper Churchill - the government of Nova Scotia rained on the Emera/Nalcor party.

The Nova Scotia government introduced a bill named "The Electrical Reform Act". What does "reform" mean? In this case it means deregulation for the electricity market in Nova Scotia, and that means an end to Emera's (through its subsidiary Nova Scotia Power) monopoly of power generation and distribution. That is a massive price to pay for a small amount of mega watts from this province.

To understand Emera's position you have to understand what Emera is and how it makes its money. Emera is the parent company of four primary businesses: Nova Scotia Power; Caribbean operations; Maine utility operations; and pipelines. In 2012, Emera made  $2.058 billion in revenues before expenses. They break down like this:

NOVA SCOTIA POWER               $1.237 billion

CARIBBEAN OPERATIONS          $  421 million

MAIN UTILITY OPERATIONS     $  205 million

PIPELINES                                  $   49 million

Basically, other some other odds and ends, that's it. Now revenue is revenue, but here is what they cleared from each in operations, before tax and other expenses:

NOVA SCOTIA POWER              $  703 million

CARIBBEAN OPERATIONS         $  151 million

MAIN UTILITY OPERATIONS    $    55 million

PIPELINES                                 $    35 million

Bottom line? Emera exists solely based on the monopoly it enjoyed in Nova Scotia. Consider that 60% of all Emera's revenue comes from Nova Scotia Power. Then consider a mind blowing 75% of its cash after operations money comes from Nova Scotia Power. The value of a utility monopoly starts to come into focus. Essentially, Emera should really be named Nova Scotia Power with a few subsidiaries.

Perhaps the biggest concern for Emera until now was its credit/debt situation. S&P downgraded both Emera and Nova Scotia Power's outlook from "stable" to "negative". The reason given in the media was the costs associated with moving away from coal generated power to "renewables". However, a look at the companies debt picture, in itself, should be a big clue. Emera's line of credit facilities have about a $600 million limit, of which about 50% is used up now. However, the big number is its contractual numbers. They include debt, and committed money to projects, suppliers, and the like. That number stands at a whopping $10.064 billion.

Then there are legal issues. It's operation in Maine is under attack for an excessively high "Return on Equity (ROE)" rate. For instance, Nalcor's ROE rate here is about 8.5. Nova Scotia Power's ROE is 9.2. Emera was just taken, by user watch dog groups, to FERC where there 11.14% ROE in Maine was ruled over the top, and had it reduced downward to an eventual 9.7%. Emera's operations in the Caribbean have been fraught with public protests over escalating rates. And now this.

Emera is going to lose its monopoly in the one place it can not afford to. The one place where it makes all its money to keep the whole operation afloat. That leaves the door wide open for Hydro-Quebec to move in with the 1000's of MW of power it can't even sell. If that happens, which you must consider a distinct possibility, then Emera is done for. It's likely future: takeover target (probably by Hydro-Quebec); and/or a takeover and break up of its assets for sale sale independently. Either way, Emera may have won the battle over the Maritime Link approval, but the cost of new regulation removing their monopoly is a real "poisoned chalice" indeed.

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