Emera Inc (EMA) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Emera Incorporated 2002 first quarter financial results conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 on your telephone. As a reminder, this conference is being recorded Tuesday, April 30th, 2002. I would now like to turn the conference over to Ms. Judy Steel, director of investor relations. Go ahead, ma'am.

Good afternoon.

Joining me from Emera are David Mann, president and chief executive officer, Rod Smith, senior vice-president and chief financial officer and Ray Robinson, Emera's vice-president, utility integration and the newly appointed chief operating officer for Bangor Hydro.

Emera's Q1 2002 earnings release, financial statements and management discussions and analysis were distributed earlier in the day via newswire. These documents are also available on our website at WWW.Emera.com along with materials from our 2002 annual meeting, which took place earlier this afternoon.

Our plan today is to have Ron begin with a very brief review of the first quarter financial, then David will give an update on the Nova Scotia Power rate case and other corporate development. We expect the presentation segment to last about 10 minutes and then we will be happy to take questions.

I will take a moment to remind you that this conference may contain forward-looking information, which involves certain assumptions and known and unknown risks and uncertainty that may cause actual results to be materially different from those that are expressed or implied by the comment. Those risks include whether commodity crisis, interest rate, foreign exchange, regulatory requirements and general economic condition.

In addition, please note that this conference is being widely disseminated via live webcast.

Now, I'll turn things over to Ron.

Thank you, Judy. I presume you've all had a chance to review our earnings release materials and I'll speak just briefly about the highlights. Emera's consolidated earnings were $33.6 million for the first three months of 2002, compared to $43.6 million last year. The earnings decrease is due to a $15.1 million decrease in the earnings of our largest subsidiary, Nova Scotia Power, and that was somewhat offset by $4.7 million in new earnings from Bangor Hydro, which we acquired late in 2001. Higher fuel costs were the primary reason for the decrease in Nova Scotia Power's earnings this quarter. Even though electricity sales were a bit lower in Q1 due to warmer temperatures year-over-year, fuel costs increased by $7 million this quarter compared to last year. This was largely due to the fact that in the first quarter of 2001, we were able to sell a portion of our natural gas supply at very high prices at the time, and we used the proceeds to offset all the fuel costs.

Gas prices are much lower in the first part of 2002. We didn't have the opportunity to sell gas, and we've earned the gas fired generation instead. We did manage to mitigate the impact of higher coal prices in the first quarter by in increasing the use of our petroleum coke, and we were fortunate to have rather large inventories of lower priced local coal available to drawdown in Q1.

As you likely aware Nova Scotia Power is currently in the midst of a rate hearing, addressing the issue of higher fuel costs. We will hope to have appropriate rate relief in the third quarter, and in the meantime, we continue to do whatever we can to minimize the financial impact.

Total revenues increased by $73 million in Q1. To reach $335 million, that's up from 261 million last year. This increase is substantially the result of the addition of Bangor Hydro. We are working to improve the returns in Bangor, and to put that in some perspective, based on the company's current regulated return of 11% and approximately $200 million rate base in Canadian dollars, Bangor is allowed to earn up to approximately $22 million annually. We have work to do to get there, and, accordingly, in March we announced the first phase of a restructuring designed to reduce operating costs by at least 20%. David will speak more about what's been happening in Bangor in a few minutes. We include our gas infrastructure investments and Emera fuels and also our new energy services business and our business development activities under the operating umbrella of Emera Energy. Emera Energy contributed $4.6 million before earnings before interest and taxes in the first quarter of 2002 and that was up from 3.1 million last year.

That's it for my overview. I'll finish up my comments by saying fuel costs and NSPI's rate case will clearly be the two factors affecting our performance as we head into the next year.

We can't predict 2002 very well just yet. We have major short-term issue with uncertainty around the rate case. We are looking for a fair and timely resolution of that situation.

Now, I'll turn the floor over to David for his comments.

Thank you, Ron, and good afternoon.

First I'd like to take a moment to introduce Ray Robinson, Emera's vice-president utility integration, and the newly appointed chief operating officer at Bangor Hydro. Ray joined us in 2001, and his first job was to complete our acquisition of Bangor Hydro. Prior to joining Emera, Ray was president and CEO of Uco Energy Corporation and he has had over 20 years of utility experience under his belt. We are very lucky to have the benefit of his leadership and experience at Bangor Hydro.

There's a lot going on in Bangor with the corporate restructuring and the alternate rate plan proceeding in tandem. I will brief you on the highlights, but we thought that it would be good to have Ray here as well to lend a hand with any questions you may have.

As you are aware, Bangor -- at Bangor Hydro, we have been pursuing an alternate rate plan with our regulator, and to focus our energies on positive negotiations with our many stakeholders there. Emera and other stakeholders, including large industrial customers and the public advocate, have reached an agreement on an alternate rate plan, and have filed the proposal with the main public utilities commission for consideration.

The proposed -- would provide for annual reductions and rates of 2 to 2.75%, in each of the next five years. It also provides for a wide earnings band, stretching from 5% return on equity, to an upside of 17% on equity. To be able to afford -- obviously, in order to afford -- to be able to offer the rate decrease, and at the same time, bring Bangor Hydro's return up to an acceptable level, the company will have to deliver on its restructuring plans. We're confident that we can do this, and expect that by 2003, we will see our efforts start to really pay off.

Nova Scotia Power is in week two of its rate hearings. So far, our financial and operational people have been on the stand. You of course won't be surprised to hear that this is getting lots of attention in the local media. Our case is strong and well presented, and we look forward to a timely and fair outcome.

Three more weeks of hearings are scheduled, with the proceedings concluding in the early part of June. We would hope to have a decision within several weeks of that date. For those of you who are following this closely, NSPI is posting daily transcripts on its website.

Most of you will recall that in late March, the Nova Scotia government announced a $10.7 million annual increase in the grants Nova scotia must pay to municipalities in lieu of property tax. We had been working with the department of municipal affairs for more than a year on this issue, when the announcement was made in the run up to the provincial budget, we were initially concerned that implementation would be in 2002, and that we would suffer a regulatory lag in getting the new tax into our cost of service. However, when the actual legislation was tabled, with the first annual payment due the end of January in 2003, it clearly became a cost for next year. We will address this amount in our 2003 rate case, which is primarily intended to provide for our new federal corporate income tax costs. Indeed, we have advised the UARB that we will be filing our 2003 rate application early this summer.

Now, Ron, Ray and I will be happy to take any questions you might have.

Ladies and gentlemen, if you would like to register a question, please press the 1, followed by the 4 on your telephone. You will hear a 3 tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press a 1 followed by a 3. If you're using a speaker phone, please lift the handset before entering your request. One moment please for the first question.

Robert Hastings, with Raymond James, please go ahead with your question.

Hi, yes. Just in terms of your fuel costs have got -- have been quite variable, and just, can you remind me what -- how you're addressing that in your rate case application?

Will there be deferral accounts for next year or will you still be on the hook for this if it were to swing positive or negative.?

Bob, there's no proposal about deferral accounts. That has not been the tradition here, and the application we made is straightforward. The costs are in there the tax year, which is this year, and our application is for rates to be effective, as soon as they possibly can be, and we go on from there.

Okay. And just can you give me more clarity on your $2.6 million business development costs that were written off in the quarter?

It's some very some very old things.

So that's now all behind it, there's no more of these?

There's always projects, but there's no more dead ones. These are things that are not going to happen, and that became clear recently and we terminated them.

Okay.

So you just expensed these and that's fully in the number then?

Yeah.

Thank you.

Winfried Fruhoff phonetic from National Bank Financial. Please go ahead with your question.

Thank you. If we are looking at the average unit fuel costs on page 4 of your news release, the increase from $25.87 last year to $28.24, how much of that increase is due to the weaker Canadian dollar and how much is due to just plain higher fuel costs?

I can't, you know, give you the proper arithmetic answer to that. The vast majority of that is higher coal costs. The smaller portion would be the Canadian dollar difference. And in 2001, if you think about it, we didn't have nearly the amount of U.S. dollar purchases of fuel that we now have in 2002, because in 2001, we were still largely local coal, so the difference year-over-year probably wouldn't be, wouldn't be that large, in terms of deterioration of the dollar. Where that really started to hurt us, was as we were making the commitments through the latter part of last year for purchases this year, the dollar was deteriorating all along the way. So I think that the answer is the vast majority of it is simply the price of coal. The lesser impact is the dollar.

You had mentioned or David had mentioned that you had switched to lower price petroleum coke at some point in the first quarter. Should this not have provided some offset, some mitigation.?

Yeah, it has and the difference would be bigger if we hadn't done that. The petroleum coke impact is in that average.

How much of that increase was due to you having burned more gas than last year?

Judy The net impact of the lower gas sales combined with burning more gas in 2002 versus 2001 was 5.8 million.

So that's in the middle of the paragraph down below there.

Yeah, I haven't been able to get through all that. I apologize for that.

Regarding the -- this is on page 6, the regulatory liability at Bangor Hydro, of $11 million approximately, is that an amount you will be able to collect in rates or do you just have to eat it and hope to offset other costs or reduce other costs by more than this $11 million over that period of time?

That is in the rates.

It's in the rates. Okay.

And regarding Bangor Hydro, how much would you say did you spend on the restructuring expenses in the current quarter? In other words, when, let me put it differently, what would have been the operateing income of Bangor Hydro if you had not spent money on reducing costs at Bangor Hydro under the restructuring plan?

There really is nothing of consequence in the first quarter, when the changes will come through in the second quarter, the things that are being done now in the second quarter will be reflected in the second quarter. And, of course, there'll be a deferral for the major downsizing costs that are involved there.

Would it be fair to say that a major increase in your costs was really much higher interest, because the interest expense is about as large as the increase in your fuel costs?

You're looking at it a different way. We'd have to take another look at that.

Our next question comes from Karen Taylor with Nezbet phonetic Earnings.

Okay. Are you done with within or would you like me to go ahead?

Judy Yeah. Win, it's Judy, the real difference in interest costs is just because of the addition of Bangor Hydro, the operation.

There are many line items that are higher, simply because the Bangor Hydro number is in there this quarter and was not last year. That would be the difference in the interest cost and many of the other things such as the revenue for the most part and so on.

Thanks. I've got one more. This is on page 3, your consolidated statement of cash flow, and I'm wondering what accounts for the large increase in the contribution from non-cash items, from about 24 million to a little over 38 million?

Because if I had up the changes in depreciation and so on, it doesn't come anywhere near that number.

Give us a second.

Thanks.

Yeah, that would be, for the most part, probably, probably all, Win, would be again Bangor being added into the mix this year, wasn't there last year, and they have a lot of, what we know as stranded assets and they're amortized over time, so a lot of it would be the amortizations, and also just the general depreciation, flowing through Bangor. It wasn't there a year ago.

Do you know then the portion of that increase from 23.9 to 38.3 million that was attributable to Bangor Hydro.?

Judy's going to have a look here and we'll -- maybe can get on with another question and see if we can come back to you on that.

Thanks. That's all I had. Thank you.

Do I go now.?

Okay, Karen.

Okay. This very quickly, the change in the effective date that you mentioned for this new tax and the timing of the rate issues for 2003, does that in your mind, effectively mitigate any timing risk associated with 2003 rates?

Are you going to file early enough to make sure that the tax recoveries and the new tax are in lieu of property taxes fully recovered in 03.

We're all going to be scrambling for the up to the answer that question. Yes, we are.

Okay. Does the contribution on a per share basis for the key businesses, you did have NSPI and Bangor, and I'm assuming the after tax amounts of 2.4 million for Maritimes Northeast is clean. Can you please just provide for me what Emera fuels SOEP incorporate would be.?

In earnings per share terms Karen ?

Uh-huh. Please.

Fuels, for the first quarter would have been in the rounding 0 or 1, depending on a little less than 1 cent, I guess is the way to put it.

Sable, 1 cent.

Mare times Northeast, two cents. The other corporate type of stuff, corporate expenses and business development all that is minus 3 cents.

Okay.

Bangor, 5 cents, NSPI, 28 cents.

Perfect. In terms of the severance program, if there was not much spent in the first quarter, previously we were all aware that the costs might be something in the order of 5 and-a-half million pretax through this year. Is that still the estimate and do we expect to amortize this amount over the 10 years, or deferred, as you indicated?

That amount is still a good estimate, and the requests by -- I think has already been made, to expense it over 10 years. That's something that there is some precedent for, but we have to, we have to ask.

Okay. And if perhaps I could impose on Ray Robinson to perhaps explain the process that the main PC will take and how long we expect them to take to approve the arc?

Ray The stipulation is in front of the commission right now. The time frame is still somewhat up in the air, depending whether or not there is a very abbreviated hearing or not.

But I wouldn't expect it to be many more weeks, a month or two.

Okay. What will determine whether or not it's an abbreviated hearing?

Ray Depending, depending upon whether or not all of the parties that were at the negotiations table sign the stipulation or not.

Is it -- given that you have an agreement, would it be your expectation that they would sign ?

Ray Well, certainly, as of today, the office of the public advocate, certainly Bangor Hydro, public utility commission staff have signed it. There is a conference call on Friday to determine if the other parties will be signatory to the agreement or not.

Those are primarily industrial customers?

Ray Correct.

And how many are there in total?

Ray There is one.

One. Okay. And then let me make sure I've addressed all of them. That's it. Thank you very much.

Perhaps I could just finish with Win's question there earlier, about how much of the increase in the non-cash items year-over-year on the cash flow statement was related to Bangor. The depreciation amount related to Bangor would be 4.3 million and the deferred amortization of deferred costs, stranded cost would be 5.8. Also, there would be slightly higher depreciation in other parts of the business, because you see on the consolidated statement that the difference in appreciation is 6-point -- 6.6 million, so that's obviously 2 and-a-half more than the 4.3. So you put all those three things together, you've got most of the difference in non-cash items. I think the short answer is most of it's Bangor.

Matthew Akeman phonetic with CS First Boston phonetic.

Please go ahead with your question.

Thanks. A couple of questions on Bangor first. Just terms of how you reported. I'm just wondering whether the acquisition debt for Bangor was included in the Bangor Hydro segment or whether that's in corporate?

That's in corporate.

So it's reflected in corporate. Okay.

I guess in no particular order, just to follow up on Win's question, around the regulatory liability for the commodity costs, what is -- I guess how did you treat that for accounting purposes?

There's none of that expensed, I guess in the period, is that right?

Judy Well, no. I mean, it, it, the way it worked through the period, if costs the -- if costs of providing the standard offer exceeded the revenues, then basically the difference was booked to another, another revenue or an expense account and the offset to a deferral.

Plus or minus point.

Judy Plus or minus, depending on the situation. And so at the end of the day, they wound up with the regulatory balance number, which is now included in the new stranded cost rate for Bangor Hydro, will be recovered in full over the next two years.

Okay. And then my last question on Bangor is just whether you've talked about commodity price risk in the context of a new arc and whether you had take any come moddy price risk in that context.

No, there is none. The standard offer services is no longer offered through the utility. It really is pure TND phonetic at this point.

Okay. Just a couple questions on Nova Scotia Power, if I can do that. On your fuel costs, I think in your filing you talked about average fuel costs per megawatt hour of about $31 in round numbers for the year. You came in significantly below that for the quarter, 28 and a quarter, I believe so. Is it fair to say for the full year you're not going to be at 31, you're going to be at something significantly lower than that?

I wouldn't say so. As I said earlier, we've done our best in the first quarter to manage with what we have available, and we have certainly in the first quarter, or at the end of the year we had a lot of local coal available to burn. That's been actively used throughout the quarter. We have increased the percentage of petroleum coke. That's cheaper. We've looked for every opportunity like that. So I guess we'd be ramping up, it's going to get more expensive as time goes by, but at the moment we don't have the results of the rate case and we're doing our best.

Okay. Thanks. Then on the sales side of Nova Scotia Power, sounds like you got hurt a little bit by weather in the first quarter. What do you see going forward -- does weather help you a little bit this month?

Does it come back? I mean, you know, are you going to see sort of flat sales this year or do you think sales might be down?

It's hard to tell. April was I think colder. I haven't seen any stats.

That's just my senses, it seems like a cold month. We don't know how the rest of the year will unfold. Certainly the winter was warmer than usual by a considerable amount. That hurt us both here and in Bangor, the rest of the year, who knows.

Judy Of all the things we might predict Matthew, the weather in Nova Scotia would not be one of them.

Or anywhere right now.

Just have one more question. There was a mention in your release around something that sound to me like a wholesale energy marketing business, That you might be providing, service like that you might be providing to third parties, I'm just wondering what, you know, maybe if you could expand on your intentions around that, the type of you know, risks you might be willing to take on in that business.

That would be -- we are doing some of that. It's agency work, procurement work where we take a fee. We're not going off and acquiring commodities and then offering them for resale. But there are opportunities in this very much undeveloped market down on this end of the country, to to provide services that no one else is, and we're looking for those opportunities and finding some.

Would that be in the local Nova Scotia market or in the U.S. or both?

Both. But most of our success so far has been in the maritime provinces.

Okay. Thanks a lot. Those are my questions.

Just one thing to follow up from your earlier question. You had the original filing of $31 per megawatt hour in the fuel costs. When we did the update filing in January, that was modified to between 29 and $30, so it will still slide up, but it's not quite as much of a gap as you are identifying there.

Linda Erzageller phonetic with CICB World Markets. Please go ahead with your question.

Thank you. Most of my questions have been answered but one follow-up question I have on Nova Scotia Power. Relates to note 9 of your financial statements. Specifically the employment reductions at Nova Scotia Power, and I'm wondering what are the up front costs associated with that, what sort of benefits do you see going forward, as well as what are you proposing to your regulator as to who gets what of those benefits?

There isn't any, any proposal with the regulator in terms of sharing those benefits. That's all just us managing our bottom line.

Okay.

I don't know the amount. It's not very large.

The employment reductions in terms of orders of magnitude would be 1% of your work force, 10%?

I don't have a number. It's a not very large.

I don' t know what percent it would be.

Probably 2%.

Judy No. I think we're-- it's really in the magnitude of 50 people, if that. And some of them are temporary, which is kind of related to the capital program over the next few months, so it will be, it's quite minimal. The work force in NSPI is probably 1600 or 1700, so it's 50 or so of that group.

Great. Thank you.

Sam Caines phonetic with Scotia McLeod phonetic, please go ahead with your question.

Thank you. On your last conference call you were adjusting perhaps great relief as of May. That has drifted to July or is there something different now, just for clarity to begin with, in your timing of getting your conclusions from your regulator.?

It's drifting, Sam. The hearing as you know, was originally postponed from what was supposed to be march into your current time frame, now in the middle of it, we expect it will be over end of May or early June, but not as early as we'd like. And then of course there has to be time for a decision, so as soon after that as possibly can be, we would like to have the decision, but we don't control that.

Therefore, the decision is proforma forward, not retroactive?

That's correct.

Best guess July 1st going forward. We're going to have to estimate your second quarter. On that my next few questions relate to that. First, your additional pension expense of 2.5 million, higher year-over-year, is that going to be 10 million a year or another 2.5 million Q2?

Again, I presume it does.

Generally speaking, yes.

Shifting, how much flexibility do you have with this petroleum coke, obviously you're going to go to the maximum you can, just understand, I guess the -- your mix capability?

I know the answer to that.

I was going to say we don't have the fuel experts in the room but Judy said I know the answer to that so let's let Judy.

Judy In one plant we have quite a lot of ability to burn that fuel, like perhaps up to 60% of the burn, but in the others, it would be closer to 10%. What you have to keep in mind is that we have to manage the burn of petroleum coke within the overall allowed limits from an environmental perspective on an annual basis.

I see, so you're able to cumulatively take what your limit is now. Would you be finished all that through Q2?

Judy I don't know the answer to that, Sam.

Okay. Anything else in Q2 that is coming in somewhat non-recurring, I guess the staff layouts to NS power looks like you have a few. You would have up front costs with that. Presumably you'd try to delay that into Q3. Anything you're trying to manage which you're trying to manage best you can in Q2, that may not come out on the surface from what we're seeing?

Well, there's a few things you probably would detect on the surface like amortization in base pay is not on the Q1 numbers and Q2 numbers.

Yeah, I understand that.

Generally speaking, there's no particular thing, Sam, that has been decided and announced and would have major impact one way or the other in Q2. I don't think so. Nothing's coming to mind.

Okay. Thank you.

Ladies and gentlemen, as a reminder, to register for a question, please press the 1 followed by the 4.

Karen Taylor with Nesbith Burns phonetic, please go ahead with your question.

Thank you, I've got two quick projects updates I'd like. The status of the 2 L 600 engine phonetic deployment, where do we sit with that and does it -- are the engines still targeted to be outside of rate base?

Karen, what -- one of of them is for sure. The other one, we have a couple of opportunities. One opportunity is is outside a rate base and one is not. But we do feel that at some point, remember that first one was originally bought as a inaudible, and will be required one way or the other at some point. So one of them will probably find its way into the rate base, can't tell you yet, we don't have a decision on that.

And the second is the -- this relates to the development business expense levels that we're seeing, with your association with Falcon gas storage. Are you still proceeding on the investigation of various storage sites in the U.S. Northeast?

Yes. The Falcon partnership is moving along and are doing their technical work, and my understanding is so far so good, but we have nothing that we can announce yet as a project that we're all committed to move ahead on.

None of the project development expenses that's were, in fact, were expensed related in anyway to Falcon?

If you could perhaps just give me general guidance on the total amounts of deferred project development expenses?

Judy In the quarter, do you mean?

In total. In total.

There's various things for many years. YOu get into trouble around definitions, we have some things we may own shares of something that perhaps is doing some development work, but I think the right answer to your question is probably around 13 million, over about 5 or 6 projects.

And how much are you adding to that to balance per quarter?

Really, we didn't add anything in the first quarter, to speak of at all. It depends to a large degree on what particularly we're working on at any given time, and right now, we don't have anything that's chewing up a huge amount of that kind of expense at the moment.

Do you anticipate bidding on any, in any particular area, for the new gas distribution, given the rules have changed substantially, we've seen major player withdrawal? Is that an activity that interests you or not?

That's not an activity, Karen, that we're pursuing.

Okay. Thank you very much.

Winfred Fruhuff phonetic with National Bank Financial, please proceed with your followup.

Thank you. About note 9, the last item there, what is the net net impact of the refinancing that you have just completed? On an annual basis?

Judy I'll have to call you back with that one, Winfred.

Thanks very much.

Robert Hastings, with Raymond James. Please proceed with your followup.

Gentlemen, on the Bangor, can you give us some idea, you started a cost mitigation process here, a reductions process, can you give us some idea how much costs you'd have to take out to achieve say a 10% return, regulated return? And what level of earnings that would be, and then sort of follow-up to that is how far along are you in this first round of cost cutting?

I know it doesn't get you all the way there, there's more to come but how far along would you be?

Really, what we've done, we've been inside Bangor Hydro for some time now, we understand its cost structure, and in effect what we're doing right now is we are aligning our cost structures with revenue. So the actions we're taking right now, once they're all in place, the cost and revenues will be in line.

So how much costs would you actually have to realign to achieve say a 10% return?

We, we basically, we're taking 20 to 25% of the O&M expenditures out of the company immediately.

And that will get you to that kind of return, the midpoint of that spread that you've negotiated?

Right. By the time we have a full year in 2003, we're certainly going to be meeting that target.

So that's your objective is to sort of be mid range for next year and then be growing above that in subsequent years ?

Exactly.

Thank you. One other question, on Glass Bay phonetic, what -- you haven't been advertising, were running out of time on that. When do you anticipate that you'll be starting that up again, or will you be taking, or will you be forced to deal with all in the last year or two?

We have included that in our rate case and it's under consideration as part of that, so -- .

At least not until you get a decision then.

Not until we get a decision then we'll deal with that accordingly.

Okay. Thank you.

I am showing no further questions at this time. Please continue with your presentation or any closing remarks.

Nothing in particular. Thank you very much, folks, for your interest, and if we can, if we can help you with anything else as always, Judy and I are available to do what we can. Thank you.

Judy Good-bye.

Ladies and gentlemen, that does conclude the conference call today, we thank you for your participation and ask that you please disconnect your lines.