DW

Question 1

Emera’s revenue

Answer 1

$4.8Bn

Question 2

Emera’s EBITDA

Answer 2

$2Bn

Question 3

Emera’s revenue trend

Answer 3

Revenue growing at 3.1%

Question 4

Emera’s margin trajectory

Answer 4

Operating margin is flat around 40%

Question 5

Emera’s current P/E ratio

Answer 5

21.4 x P/W

Question 6

Emera’s 2017 P/E ratio

Answer 6

23.3x P/E

Question 7

Emera’s U.S. Peers

Answer 7

Southern Co, AEP, Duke Energy

Question 8

Emera’s Canadian peers

Answer 8

Algonquin Power, Canadian Utilities, Hydro One

Question 9

Emera’s leverage / balance sheet profile

Answer 9

EBITDA interest coverage: 3.5x
Debt / EBITDA: 6.0x
FFO / debt: 12.2%

Question 10

Emera Acquisition multiple

Answer 10

10.2x-11.6x 2019 EBITDA from 10%-30% premiums

Question 11

Emera’s rate base and rate base growth

Answer 11

$18 bn & 8.2% through 2022

Question 12

What drives Emera’s growth

Answer 12

Rate base expansion which results from efficient allocation and investment of capex and decreasing asset depreciation. Regulatory commissions determine how much and what that capex can be invested in—hence why renewable focused investments are efficient drivers of rate base expansion.

Question 13

Emera’s mkt cap

Answer 13

$10Bn top 25-30 utility by size

Question 14

Emera investment rationale (Rule of 3)

Answer 14

1) Favorable Valuation
2) Market / Rate base
3) Strategic suitability

Question 15

Why was Emera favorable from a valuation perspective

Answer 15

Despite having 81% of its operations in USA, Emera trades at a discount to U.S. midcap peers—much like other Canadian based utilities. This discount has persisted over past 5 years despite Emera having a larger US rate base than several other US small to midcap peers

Question 16

Why was Emera attractive from a Market / Rate base perspective

Answer 16

—Significant concentration in Florida (68% of T&D assets by 2021).
—Florida is higher than than average growth jurisdiction
—Florida small-midcap utilities trade at a 2.0x premium to peers in other jurisdictions
—Commands 10.25% ROE (Nat’l avg=9.6%)
—Commands 54% Equity/Cap ratio (peer avg=49.5%)
—Favorable regulatory position re: renewables

Question 17

Why was Emera attractive from a strategic perspective

Answer 17

Emera’s asset profile was ideal match for Fortis’s aggressive roll up strategy given Emera’s focus in US electricity and gas distribution. Fortis also has no Florida presence

Question 18

What is PNW’s rate base and what’s it growing at?

Answer 18

$9Bn rate base growing at 6.5%

Question 19

What is PNW’s revenue

Answer 19

$3.9 Bn revenue

Question 20

What is PNW’s EBITDA

Answer 20

$1.6 Bn EBITDA

Question 21

What is PNW’s revenue trend?

Answer 21

PNW revenue growing at 3%

Question 22

What is PNW’s margin and margin growth

Answer 22

PNW has operating margin of about 39% growing at 65 bps

Question 23

What is PNW currently trading at?

Answer 23

PNW currently trading at 17.3x P/E

Question 24

What was PNW trading at in 2017

Answer 24

In 2017 PNW was trading at 21.4x P/E

Question 25

What are PNW’s peers

Answer 25

Alliant Energy, El Paso electric and Tucson electric power

Question 26

What are PNW’s peers trading at?

Answer 26

PNW’s peers are trading at 20.8x P/E

Question 27

What is PNW’s Leverage / Balance sheet profile

Answer 27

EBITDA Interest coverage: 5.4x
Debt / EBITDA: 4.0x
FFO / Debt: 22%

Question 28

What was PNW’s acquisition multiple

Answer 28

The acquisition multiple was 12.1x-13.6x 2019 EBITDA from 10%-30% premiums.

Question 29

Discuss Utility industry outlook and trends

Answer 29

Very mature industry that has experienced significant consolidation in the last decade. Very few IPOs, last one was Bloom IPO in 2018 and it’s gone horribly since, that said—bloom is a fuel cell company so not truly comparable to your standard vertically integrated utility. More recently due to COVID the industry has faced unique supply chain disruptions as many renewable energy supplies come from Asia—specifically countries that were hit heavy by COVID. Additionally, though many services / processes can be done remotely, the industry does require a large portion of its workforce to ensure reliable delivery of energy, gas and water. Looking ahead, decarbonization and investment in renewable energy will define the next decade of the industry. Players who’re making early investments in renewables stand to benefit greatly as the secular tailwind intensifies.

Question 30

What is PNW’s market cap

Answer 30

PNW has a $8.2 Bn market cap and is a top 30-35 utility by size

Question 31

What made PNW an attractive investment (rule of 3)

Answer 31

1) market / jurisdiction focus
2) financial (great returns potential)
3) strategic (renewable portfolio enhancement)

Question 32

What made PNW attractive from a market / jurisdiction perspective?

Answer 32

—Opportunity to meaningfully expand Fortis’s Arizona market share
—PNW is dominant in Phoenix and Maricopa county. This is significant b/c Phoenix is triple the size of Tucson(Fortis’s primary Arizona market) and Maricopa county is the fastest growing county in the U.S. and is responsible for PNW’s unmatched retail customer growth of 2.5%.
—PNW commands 63% market share compared to Fortis’s 22%

Question 33

Why was PNW attractive from a financial perspective?

Answer 33

—Outstanding returns potential relative to small-midcap peers in both Arizona and U.S.
—PNW has 56% Equity/Cap ratio making it highest in state. Fortis has 50% Equity/Cap
—PNW’s ROE is 10% compared to national average of 9.6%
—PNW earns a return of .8% on the delta between the original cost and fair value of its assets, no other utility in the state exceeds .5%

Question 34

What makes PNW attractive from a strategic perspective

Answer 34

—PNW has a fat superior renewables portfolio relative to Fortis’s own in AZ
—Renewables are 50% of PNW’s portfolio, but only 7% of Fortis’s
—Holds true in the long term: PNW expected to reach 65% by 2030, Fortis expected to reach 30%
—Given the significant near term and long term delta in renewable capacity, Fortis could attain far greater Renewable Electricity Production Tax Credits
-Arizona’s renewable portfolio standards mandate that Fortis would have to double its renewable capacity before 2025, PNW exceeded that standard years ago and will continue to be well ahead of it

Question 35

Describe Fortis

Answer 35

Canadian Electric and gas distribution company that offers regulated utility services across Canada and in the U.S and Caribbean with a market cap of $25 Bn (top 15 utility by size) and revenue of $9 Bn

Question 36

Investment risk (Not regulated asset related) / mitigating factor

Answer 36

Fortis was engaged in aggressive roll up strategy over past 6 years and management identified acquisition risk as a key concern.

Mitigating factor: we ran several cases including a “break even” and “maintain ratings” case at 10% 20% and 30% premiums. We priced in Mandatory converts (4.1% cost of debt) as well to give client confidence that we could pursue accretive transaction while offering control premiums that target shareholders would be unlikely to refuse.

Question 37

Investment risk (Not acquisition risk related) / mitigating factor

Answer 37

Fortis mgmt was concerned about the regulated exposure of its asset portfolio—over 90% portfolio was regulated

Mitigating factors:
—Though Emera has a similarly highly regulated portfolio, a majority of these assets were in highly favorable jurisdictions with little to no history of negative regulatory outcomes.
—PNW possessed a more balanced portfolio with over 25% of its portfolio composed of unregulated assets. Moreover, PNW has been and continues make significant investments in EV charging infrastructure that will only augment the unregulated portion of its portfolio