Emera Pubnico Point Wind Farm in Nova Scotia. In the past year, the company has raised its dividend three times.
Bay Street is officially back to school. After an extremely slow August, September is starting with a bang, fuelled by Emera Inc.'s $1.9-billion financing to help fund its major acquisition of TECO Energy Inc.
The $10.4-billion (U.S.) takeover, including debt, was announced late Friday, causing logistical nightmares for everyone who follows the company. However, Emera's management team felt it was necessary to get the news out before the long weekend. The company had plans to start raising money first thing Tuesday morning and the financing is rather complicated, so executives wanted to give investors a few days to digest the deal before having to wrap their heads around the new offering.
Instead of selling straight common shares, Emera is offering $1.9-billion (Canadian) worth of "convertible debentures represented by instalment receipts." Breaking that down: as with all instalment receipts, investors will pay a third to Emera up front and then cough up the rest at a certain date – in this case, once the deal closes. Until doing so, they will earn 4 per cent annual interest, which means they effectively earn 12 per cent until the deal closes, when they have to pay the remaining two-thirds of the debentures' costs.
Taking this one step farther, by structuring these receipts as convertible debentures, Emera allows investors to convert this "debt" into equity at a discounted price once the deal closes. In this transaction, investors will get roughly a 5-per-cent discount. They are also guaranteed the 4-per-cent interest for the first year, regardless of whether the takeover gets all its necessary approvals. Emera benefits from this structure, too, because its interest payments are tax-deductible, which means the convertible debentures are treated as a debt.
Because such complicated arrangements can make your head hurt, Emera spent Tuesday morning talking to institutional investors. Fortunately for the company, management won't shock the market with this structure because their deal is a replica of the Fortis Inc. financing that helped pay for the utility's acquisition of UNS Energy Corp. a few years back. In that deal, Fortis launched a $1.8-billion financing with almost identical terms and the offering was very slow selling because investors needed time to wrap their heads around it.
In many ways, the Fortis deal is a pretty decent proxy for the entire Emera takeover. Once a small East Coast power utility, Fortis kick-started an ambitious growth campaign in the United States and eventually shelled out billions to acquire an Arizona-based company.
Emera's takeover fits the same mould, only its major acquisition has assets in Flordia and New Mexico. TECO Energy is the holding company for three regulated utilities: Tampa Electric, Peoples Gas, and New Mexico Gas Co., which TECO acquired roughly a year ago. All three utilities are heavily weighted to residential and small commercial customers.
Emera is also betting more. The new deal doubles the sizes of the company, skewing its assets much more heavily toward the United States. If the acquisition closes, the company's total assets will increase to approximately $20-billion (U.S.), with 56 per cent in Florida, 23 per cent in Canada, 10 per cent in New England, 6 per cent in New Mexico and 5 per cent in the Caribbean.
The acquisition comes on the heels of recent utility consolidation south of the border. In August, Southern Co. announced a deal to acquire AGL Resources for $112-billion, and Exelon recently tried to buy Pepco for $6.8-billion, hoping to create one of the county's largest utility companies, but had its deal blocked by regulators.
Emera believes its acquisition will be accretive in the first year because TECO has $1.7-billion of net operating tax losses and tax credits. For that reason, no major cost cutting is needed to make the deal financially attractive to shareholders.
"I'd say, for us, this transaction and the financial merits of this transaction really aren't centred on synergies in the traditional sense. So I think the synergies will come from what the team can do together to drive future growth and additional earnings," Emera chief financial officer Scott Carlyle Balfour said in a conference call Friday.
With $1.9-billion (Canadian) now in its coffers, Emera still has plans to sell between $800-million and $1.2-billion (U.S.) worth of preferred shares, as well as raise between $3.4-billion and $3.8-billion worth of new debt, to help fund its takeover.