Regulator penalties are just getting bigger for Emera (CA:EMA) subsidiary Nova Scotia Power and that should have investors concerned.

Last week, the Nova Scotia Utility and Review Board socked the utility with a $750,000 penalty for failing to meet five of 14 performance targets set by the provincial regulator.

It isn’t the first time the regulator penalized Nova Scotia Power for failing to meet annual performance targets. It was penalized $250,000 in 2019 and $375,000 in 2021.

Nova Scotia Power has failed to meet certain performance targets every year since it was established in 2016.

If you are a shareholder of Emera, Nova Scotia Power’s inability to meet the standards set by the regulator ought to be concerning. It also should make you think twice about owning Emera stock.

Those shares are down almost 18% in the last 12 months. However, Emera is paying a dividend that currently yields 5.4%.

Business Is Generally Healthy

The Aug. 16 fine isn’t the first time a regulator has fined a utility owned by Emera, and it won’t be the last. But that’s not the issue. Neither is the size of fines.

Emera’s various utilities generated $7.6 billion in revenue in 2022 from $40 billion in total assets. (All figures in Canadian dollars, unless otherwise specified.)

It plans to spend between $8 billion and $9 billion on its business through 2025. It’s got plenty of cash to cover the penalties.

However, Emera’s failure to meet these regulator standards suggests it isn’t investing what it should in Nova Scotia Power, which could hurt any sale price it could obtain should the parent decide to unload the utility to focus on its Florida utilities.

And none of that would surprise Emera shareholders living in Nova Scotia.

In November 2022, Emera put its clean energy projects in the province on hold after the provincial government capped the increase Nova Scotia Power could charge its customers over the next two years at 1.8% (excluding increases linked to fuel costs), significantly below the 14% increase it had asked for from the provincial government.

“The last capital plan included $500 million in planned investment in the Eastern Clean Energy Initiative, including the Atlantic Loop, to fund new wind generation, transmission, infrastructure upgrades and battery storage to help facilitate the transition away from coal-fired generation,” CBC reported CEO Scott Balfour’s comments from November 2022.

“Given the restrictions imposed by Bill 212, these cleaner energy investments have been forced to be put on hold as our capital investments at Nova Scotia Power are now required to only focus on maintaining system reliability.”

If the decision by the Nova Scotia Utility and Review Board is any indication, it seems Nova Scotia Power can’t even manage the bare minimum. Investors should question whether Emera can adequately serve its more than 2.5 million customers in Canada, the U.S. and the Caribbean.

Stock’s Been a Real Stinker

Emera’s May/June 2023 presentation shows that it’s generated a 9.5% total return for shareholders over the past 10 years, through March 31, 2023. However, through Aug. 16, its 10-year total return is 8.78%, 151 basis points less than the S&P 500 index. Worse still, compared to NextEra Energy (US:NEE), one of the largest utilities in the U.S., its relative underperformance is 567 basis points.

Emera states in its most recent presentation that its goal is to increase the annual dividend payout by 4-5% while aiming for a 5% yield. It’s increased its revenue by 5% compounded annually since 2000.

If you examine its share price movement since 2000, you will notice that it’s become more volatile in the past decade as Emera’s expanded beyond its Nova Scotia roots. In 2015, it made the largest acquisition in its history, paying US$10.4 billion to acquire Tampa Electric Co. and People’s Gas and the utility’s more than one million customers.

At the time of the Nova Scotia Power rate cap last November, Emera’s CEO said it would redirect expenditures from Nova Scotia to Florida. Approximately 75% of its capital plan through 2025 is geared toward Florida.

If you’re a Canadian investor, you might not care that this is happening.

However, the siphoning off of capital from Nova Scotia projects will ultimately hurt the valuation of Nova Scotia Power, which should act as a headwind to a higher EMA share price.

It could be time to sell.

This article originally appeared on Fintel

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