|Shares Out. (in M):||232||P/E||14.5||13.8|
|Market Cap (in $M):||9,297||P/FCF||14.5||12.5|
|Net Debt (in $M):||15,211||EBIT||1||1|
|Borrow Cost:||General Collateral|
Purchase November 18 and January 19 put options. Implied volatility on these strikes is ~12% - 15%, creating an opportunity to get fairly inexpensive exposure to a material negative equity event (either significant dilution and a dividend cut, or a downgrade to junk by Moody’s)
Emera is a Canadian utility that owns TECO Energy (Tampa Electric Company and New Mexico Gas Company), Nova Scotia Power Inc (vertically integrated electric utility), Emera Maine (electric T&D utility), Emera Caribbean (electric utility), various gas pipelines in Canada and power generation assets in Canada and New England. Approximately 90% of EMA earnings are from rate-regulated businesses, which enables forecasting cash flow within a relatively tight band.
EMA announced their acquisition of TECO at a 48% premium to TECO’s unaffected share price (total EV of $10.4B USD, and LTM EV/EBITDA of 11.6x) in September, 2015. This acquisition, combined with project delays and accompanying rate deferrals at the Muskrat Falls transmission lines, are the two primary contributors to EMA current credit situation.
Consolidated CFO pre-W/C <12%
Moody’s laid out the credit bogey for EMA to maintain consolidated CFO pre-W/C to debt of greater than 12% back in June of 2016. EMA’s performance on this credit metric was 6.1% for TTM ending 12/31/2016, and improved to 10.1% for LTM ending 09/30/2017. Moody’s placed a negative rating outlook (to junk) on 12/21/2017 after reviewing LTM ending 09/30/2017. I believe that EMA will fall materially short of the 12% bogey for the TTM ending 09/30/2018, potentially leading to a downgrade when Moody’s completes their annual review (likely due in December 2018). Furthermore, I don’t believe that EMA can reach the 12% bogey by even 2020, assuming that EMA is maintaining debt levels at Q22018 levels and funding a cumulative cash flow deficiency (CFO - CAPEX - dividends) or ~ negative $2.5B with common equity.
Credit Metric Calculation