Monday was a relatively quit day in the markets with the S&P 500 down 0.1% and Toronto down 0.15%. You would never know that any big news (the Mueller Report) came out over the weekend.
Couche-Tard was up 3.3% and Toll Brothers was up 2.8%.
I was interested today to see that Emera (parent company of Nova Scotia Power) is selling a $1.3 billion Maine utility to ENMAX which is the power utility owned by and serving the City of Calgary. Canadian utilities have had a lot of success in buying U.S. utilities. Most notably Fortis Inc. has a great track record and Emera has also done well. I worked for many years in a career involving utility regulation. I never quite understood how the Canadian utilities could apparently out-bid U.S. utilities for regulated U.S. utilities. It might have something to do with Canadian utilities trading at high P/E multiples due to their high dividends and due to the Canadian dividend tax credit and also due to a regulatory system in Canada that was probably less risky for the utilities. In addition, in regulatory hearings we learned that Canadian utilities buying U.S. utilities could apparently deduct the same interest on both sides of the border! In regulated utilities, the customers directly cover the deemed income tax expense. Part of the “game” is typically to collect revenue for that income tax “expense” but then not really have to pay it all due to tax deductions at the parent level and other tax-saving initiatives.
There was no indication of what gain, Emera would book on this sale but I suspect it will be a substantial gain. ENMAX is financing the purchase entirely with debt. Meanwhile they will likely argue in front of regulators that a utility needs to paid as if it has financed about 40 to 50% of the cost with equity. Essentially ENMAX will want to be paid about a 10% return on equity on about half of the book value rate base acquired while financing it with debt closer to 3%. The fact that ENMAX is owned by the City of Calgary may allow it to borrow very cheaply.
Emera would have been getting paid a regulated return on the book value of the utility (less any goodwill that Emera paid when it acquired the Maine utility). But it will no-doubt have sold the utility at an amount substantially above the regulated book rate base value. So, ENMAX will likely be paying substantial goodwill on which it will earn nothing. But the regulated return on the rate base may be sufficient to make the overall purchase price paid worthwhile.
I suspect Emera has got a good deal with this sale but it might work out well for ENMAX too with its approach of financing with cheap debt.