New Emera boss set to tackle challenges with balance sheet
The new CEO of Halifax-based utility Emera Inc. says he’s committed to increasing earnings, cash flows and dividends even as the company’s balance sheet comes under intense pressure in the wake of a major recent acquisition.
Scott Balfour made the comments at Emera’s annual general meeting in Toronto on Thursday.
As Emera’s former finance chief, Balfour may be just the person to pull off such a feat, but if movement in the share price is any indication, investors aren’t yet convinced.
Emera’s stock price has fallen nearly 18 per cent year to date, as the impact of U.S. tax reform becomes clear.
In February ’s Q4 conference call, Balfour — still chief operating officer at the time — announced that Emera had recorded a $317-million tax expense, and that reforms would crimp cash flows by $50 million to $200 million per year.
The timing couldn’t have been worse. Debt at Emera had nearly tripled following its US$10.4-billion acquisition of Florida-based TECO Energy, and interest rates were rising quickly in the U.S.
Fears of a funding shortfall, or even a possible credit downgrade, have weighed on shares, which closed at $40.62 in Toronto on Friday. Analysts surveyed by Bloomberg have largely stood by a consensus target of $48, with 11 buys, four holds and only one sell.
Ben Pham at BMO Capital Markets reiterated an outperform rating in his Q1 research note on May 11, and a $51 target on the stock, implying dividend-inclusive upside of 30 per cent. “We believe rising interest rates and U.S. tax reform driving funding concerns have contained stock performance in the short term. Ultimately, though, we see funding as manageable and higher cash flow and dividends will likely drive the stock higher.”
Balfour, who became CEO on April 1, benefited from a year-long transition and said that he and his predecessor Chris Huskilson had much in common despite their different backgrounds. Whereas Huskilson rose from the engineering ranks, Balfour has more of a financial background — and that could come in handy as Emera looks to reshape its balance sheet.
“We’ve stated our intention to work our the balance sheet so that we move towards our targeted capital structure, which means we need to de-lever a little bit,” he said. “We need to make the equity component of our balance sheet a little bit stronger.”
Indeed, Emera has issued over $1 billion equity since the first quarter of 2017, including dividend reinvestments and a $300-million preferred-share issuance. While equity dilution is never popular with shareholders, it’s an option that, Balfour said, will help to bring its balance sheet back to a 55/35/10 ratio of debt, equity and hybrid capital, and address dividend and other capital funding requirements.
The company has stayed steadfast in its commitment to grow dividends by eight per cent annually, despite an uncomfortably high payout ratio of 81 per cent of earnings.
Earnings, however, are growing fast enough to outpace dividends, and that should bring the ratio back into line — within the company’s 70- to 75-per-cent target range — by 2020. “We have every confidence that we’ll grow our way back down to a lower payout ratio,” said Balfour.
Emera is also trying to mitigate the impact of that huge tax expense by working with state regulators. On March 1, the Florida Public Service Commission approved a settlement deal with the company’s Tampa Electric subsidiary that will allow it to recover around $100 million in storm recovery costs relating to hurricane Irma.