Emera Inc (EMA) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Emera's third quarter results conference call. Please be advised that this conference is being recorded. I would like to turn the meeting over to Ms. Judy Steele, Director, Investor and External Relations. Please go ahead, Ms. Steele.

Good afternoon, everyone, and thank you for participating in our call today. Joining me from Emera are Chris Huskilson, President and Chief Executive Officer; Nancy Tower, Chief Financial Officer; Ralph Tedesco, President of Nova Scotia Power Inc.; Rob Bennett, President of Bangor Hydroelectric Company; and Greg Blunden, General Manager of Finance for Nova Scotia Power.

Emera's third quarter earnings release financial statements and MD&A were distributed earlier today via newswire. These documents are also available on our Web site at www.emera.com. Today we'll have Chris begin with an update, Nancy will then review the third quarter financial results in detail. We expect the presentation segment to last about 10 minutes, after which we'll be happy to take questions from analysts and investors. Please note that all amounts are in Canadian dollars with the exception of the Bangor Hydroelectric where segment results are reported in U.S. dollars.

I will take a moment to remind you that this conference call may contain forward-looking statements which may contain certain assumptions and known and unknown risks and uncertainties that may cause actual results to be materially different than those expressed or implied by the comments. Those risks include weather, commodity prices, interest rates, foreign exchange, regulatory requirements, and general economic conditions.

In addition, please note that this conference is being widely disseminated via live Webcast. Now I'll turn things over to Chris.

Thank you, Judy. Good afternoon, everyone.

Emera's consolidated net earnings were C$19.5 million for the third quarter of 2006, compared to C$16 million for the same period in 2005. Quarterly based earnings per share were C$0.18 compared to C$0.14 in '05. The improvement year-over-year is driven by Nova Scotia Power, where earnings have returned to normal levels after a weaker 2005. Nancy will speak in detail about the financial results shortly.

Now I'd like to take a moment to talk about some recent developments at Emera. National Energy Board hearings related to our proposed C$350 million Brunswick pipeline project begin on Monday in St. John, New Brunswick. Our team along with our partners at Duke Energy have been working diligently to put our best case forward. We've also been very actively engaged with stakeholders in the area to ensure that we understand their concerns. It's important that everyone understands our commitment to safety, to the communities in which we operate, and the benefits that LNG will bring to St. John and the region.

I believe that the vast majority of the community is behind this important project and indeed last night the City of St. John common council voted to support the project and the proposed land-based routing. The Brunswick pipeline is a solid investment for Emera, which will provide incremental earnings via AFUDC during construction next year and ultimately provide a step change in our earnings once it is up and running towards the end of 2008.

Last month, Bangor-Hydro conducted a formal groundbreaking ceremony for the northeast reliability interconnect. After completing a successful permitting process earlier this year, construction is now well underway with a full completion on target for the end of 2007. As well, we are working to finalize a contract for a significant portion of the output from the Bear Swamp generating facility. Contracting a portion of that merchant facility enhances the consistency of its returns and improves its risk profile while still maintaining some upside opportunity. We expect that deal to be completed in Q4.

With that, I'll turn things over to Nancy for the financial update.

Thank you, Chris, and good afternoon, everyone. As Judy mentioned, our third quarter financial results were released earlier today and are on the Emera Web site. I'll take a few minutes to review them. Emera's consolidated net earnings were C$19.5 million in the third quarter of 2006 compared to C$15.9 million for the same period in 2005 and C$22.1 million for the third quarter of 2004. As Chris noted, our third quarter results reflect an improvement in earnings at Nova Scotia Power after a challenging 2005.

NSPI's contribution to quarterly earnings was C$12.7 million in Q3 2006 compared to C$2.7 million in Q3 2005. This improvement is due to the combined affect of an electricity price increase earlier this year and lower fuel costs due to increased hydro production and lower natural gas commodity prices and increased gas margin as a result of the renegotiation of NSPI's natural gas supply contract late in '05. Sales and production volume decreases associated with the temporary shutdown of a large industrial customer had a minimal affect on electricity margin in the quarter. The customer is currently in the process of restarting operations and it's expected to operate throughout the fourth quarter.

Nova Scotia Power expects to earn a regulated return on equity within its allowed range in 2006. Nova Scotia Power filed a rate application on October 10 requesting an average increase of 7.5% in electricity rates, effective April 1 of 2007. Increased fuel expense, in particular higher fuel oil prices is the key driver in the rate request. The application also includes the recovery of previously deferred and paid taxes approved by the utility and review board. Hearings are scheduled to begin January 22nd. Ralph and his team remain focused in preparing for the hearing and ensuring a successful outcome.

Turning to Bangor-Hydro, Bangor's U.S. Q3 2006 net earnings were $4.6 million compared to $3.6 million in Q3, 2005. This improvement is largely due to the capitalization of operating costs to the northeast reliability interconnect project now that we have moved into the construction phase. The earnings contribution of Emera's other operations was C$1.7 million in Q3 2006 compared to C$8.8 million in Q3 2005. I will remind you that we recognized a C$3 million after-tax gain in the third quarter last year associated with the foreign exchange translation of U.S. denominated debt.

Also, as you may recall during the third quarter of last year, there were major movements in energy prices and constraints in supply that provided very favorable market conditions for both our energy services business and our bear swamp generation facility. These market conditions did not prevail in the third quarter of this year resulting in lower contributions from both businesses. We are still pleased with our investment in Bear Swamp and looking forward to the regulatory market changes associated with forward capacity payments announced earlier this year will provide a stable and predictable return profile for this asset. Consolidated net cash provided by operating activities was C$98.8 million in Q3 2006 compared to C$116.7 million in Q3 2005, reflecting a net increase in operating working capital requirements.

That's it for my financial overview. Thank you. And now we'll be happy to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] The first question is from Mr. Bob Hastings from Canaccord Adams. Please go ahead.

Thank you. Looking at the Bear Swamp, Nancy, the power prices were definitely down 30% in the quarter as were your revenues there, but I noticed the fuel costs were only down about 20%. So you got a little bit of squeeze going on in the margin and in that fuel cost for you is purchase powers, so can you give us a little more color on that?

Really it was a function of the natural gas prices, the decrease and lower on-peak prices. That operation really makes money on the on-peak, off-peak spread, as you've talked about. I think that's really the story.

So you just had the squeeze basically from between the on-peak, off-peak?

Yes. And last year power prices were much higher, and that's the reduction in margin this year.

I caught the power prices, it was the fuel which would have been in the middle of my prices. Anyway, so looking ahead to the fourth quarter when you're going to put in your new contract system or LICAP, do we look for any seasonality changes here? Do we look at more stability? Can you give us an idea of what to look forward to?

Bob, it's Chris. I think what's going to happen as the LICAP settlement comes in, what you're going to see is continued growth in the earnings of that business, because that's a phase-in. And as well, there's a little bit of seasonality in that the spreads look a little bit wider when you're in the winter season for sure. And lastly, we're also working on contracting a piece of that unit. So all those things will come together to make the unit a little more profitable as time goes on.

Yeah. Including the fourth quarter? Or will that start to kick in next year?

It's really more next year. I think LICAP doesn't start until December 1st.

Okay. And congratulations on the Brunswick pipeline, I saw that, that was good. Can you tell us what your investment is in Brunswick now, to date?

I think it's around 6 or C$7 million year-to-date.

How much of that would have been in the third quarter?

Let us look that up.

And you're capitalizing all those costs, of course?

We are.

Okay, thank you.

Thanks, Bob.

Thank you. The next question is from Karen Taylor from BMO Capital Markets. Please go ahead.

Thank you. Can I just step back to the rate application and issues list that was subsequently released? That list seemed a little bit broader than, I guess, my conversations with you would have led us to believe. Can you just talk about on the inclusion of things like the return on equity and capital structure and whether we're going to have a full-blown cost of capital in association with the '07 application?

Karen, Ralph Tedesco here. We think there are really three key issues in the filing, and those would be fuel, the inrates of the previously deferred taxes, and the depreciation change, which reflects an earlier board decision not yet included in rate as well as a minor dollar amount for pension. I think the intention of the Board is to make sure that stakeholders can ask whatever questions they would like to throughout the information request process and it would be my expectation that as we move through that, the issues would become more sharply focused.

So are they going to reissue the issues list, or --?

We expect that there will be a reissued issues list. I would not expect necessarily a significant change. But as we move toward the hearing, I would expect that would well narrow the focus of the hearing.

So at this point, the interveners or the regulators, is it -- well, I guess maybe it's too early to say, but they have no particular concerns with the capital structure and ROE?

Not that I'm aware of.

Can you also just talk about last week, the government reissued its wholesale market portfolios as well as a renewable portfolio standard. Can you talk about how those two initiatives will affect utility and just remind me how much the six municipal electrics constitute of your load?

With regard to the six municipals, I think it's about 1.5% or something like that, and the current circumstances that those six municipals are able to take electricity from any generator in the province, so across our transmission system and of course paying the transmission charge. On a going forward basis, there's certainly interest not only in our part but in the province as well to move forward on renewable energy and I would expect as the session of the legislature unfolds, particularly after the first of this year -- first of next year, that there'll be more attention paid to that.

And what would the implication be? So are we going to be expecting that NSPI is the primary contractor here? If the other municipalities are really quite small, you're having trouble getting the fuel costs reflected and rates renewables tend to be significantly higher in cost than your overall embedded costs right now using fossil. How is that going to get balanced in that annual regulatory reprocess we have to go through for fuel costs?

One of the things we've been very careful about is making sure that those contracts are approved by the regulator, and thereby and then included as part of our fuel costs, which are a direct pass-through. I would expect that we would continue to sustain that posture. In terms of the contracts that we've entered into thus far, they have been economic in comparison to alternative sources of energy in our system. So not only are we beginning to adjust our greenhouse gas profile, but as well help moderate costs.

Okay. And lastly, again on the renewable portfolio, the contracts are approved before you execute them, or conditional upon UARB approval?

Generally the latter.

Conditional. Okay, thank you.

Thank you. The following question is from Linda Ezergailis from T.D. Newcrest. Please go ahead.

Thanks. I see you changed your accounting for inventory from a FIFO to an average costing approach. The C$1 million what I would consider to be a one-time expense, that would be a pretax number, I would imagine, what would be the after-tax number?

Hi, Linda, it's Greg. You're correct the pretax number. The after-tax number would be about 60% of that or C$600,000.

Okay. That's great. It was great to see an outlook for both NSPI and Bangor-Hydro and I guess Bob was trying to get at it a little bit as well in terms of what we might expect for Bear Swamp, but just expanding to looking at the whole other segment, can you give us any sense of how you expect those contributions in aggregate to trend assuming no huge change in peak/off-peak power prices in New England?

Linda, it's Nancy. I think if you look at our "other operations" for the first nine months of the year, we reported consistently in and around C$2 million of earnings in each quarter. So in aggregate, Bear Swamp Energy Services, Maritimes Northeast and those other categories, I think the C$2 million is probably a good estimate for the last quarter of the year.

Okay. And looking beyond to next year, how much of the lift is is there potentially in terms of contracting activity at Bear Swamp, the new capacity payments, et cetera?

Linda, we'll be in a better position to talk about the 2007 -- any outlook for 2007 in Q1 of next year.

Okay.

We certainly would expect some increased activity -- again, first of all, Bear Swamp, again, depending on where power prices go and the spread between on-peak and off-peak will determine where that is. We do -- we're optimistic that we will have this unit contracted and that will provide more stability in terms of revenue there. We will expect some modest uptick in our other earnings through those investments. As well, we are anticipating recapitalizing some of the -- or I should say -- I keep saying recapitalizing -- capitalizing the Maritimes and Northeast U.S. costs that have been written off for accounting purposes, related to the expansion of the U.S. facilities. That will provide, again, a little bit of an uptick in the Maritimes and Northeast. We would see modest improvement there next year.

Okay. Last question on your hedging at NSPI. Can you give us an update on activity there?

Sure. With regard to solid fuel at the end of Q3, we're about 80%. With respect to freight for fuel, we're in the -- about the 95% category. And with regard to heavy fuel oil and natural gas, we're about 75% hedged.

Is that for Q4 --

'07, I'm sorry.

I'm sorry, the last number? Natural gas was

I'm sorry, natural gas and heavy fuel oil combined are 74, 75%.

Okay, and for 2008?

In the same order, on solid fuel, we're roughly 50% hedged; on HFO and natural gas, we're roughly 25% hedged for '08.

And the freight would be --?

On the freight, for '08, ocean freight is about 55% and land freight of 100%.

Okay, thank you.

Thank you. The following question is from Matthew Ackerman from CIBC World Markets. Please go ahead.

Can you update us on the financing plans both in the short-term and over time for the Brunswick pipeline?

Matthew, in the short-term, those costs are being covered by REPSAL, and they are reimbursing us with the plan that we would repurchase those costs from them once the NEB has approved the pipeline. So in terms of financing, it would be after that process before we would be out there financing that. We said we would do it a combination of debt and equity, but we refine those -- our cash flow projections and all those projections all the time. But certainly that would be our plan at this point.

So the equity financing part of it, would that come after the pipeline is in service, or during the process?

Depending on our cash flows, we've looked at it, it might be close to the beginning of the second year, but it changes -- we continue to look at it, I would say. There would be nothing definitive at this point.

What about the investments in scrubbers that were there and then kind of put on the shelf? Are you guys on the need for investments in scrubbers at NSPI?

Matthew, at this point, that particular application we have delayed and it's been included in something called an integrated resource planning process. So at this point, as we look at compliance in the first required year in 2010, it's very likely that we will be fuel switching. What the outcome of that IRP process will be is yet to be determined. But the cost of fuel switching and scrubbers is pretty close and ultimately, it depends on not only what our stakeholders think works best, but obviously what the Company thinks works best, and then ultimately the regulator will decide.

And the timing of that decision would be about when?

Right now, we're not expecting that the IRP process will be complete until late summer of '07.

Okay, thank you.

You're welcome.

Thank you. The next question is from Robert Kwan from RBC Capital Markets. Please go ahead.

Thank you. I know you can't speak on specific projects, but is there an update on the acquisition strategy? And just broadly with respect to the flow you're seeing in various geographies and the types of assets?

It's Chris. I think at this point in time, it's a bit early to start talking about where we're going next. We're very active in our home market, we're continuing to look at projects and potential expansions around our existing businesses, and we're also starting to look at some other markets, but it's early days from that perspective.

Okay. And has the activity around the Brunswick pipeline caused you to slow down with respect to development activities?

No. I would say that it hasn't. We've actually put together a very solid team around the Brunswick pipeline and that team is focused on that project. We've put a President in place for that company, Robin and he's been doing a great job and together I think they're going to be able to move that project forward.

Okay. And just lastly on the Brunswick pipe, do you have an expected spend through '07 and '08? Just the timing of the capital outlays?

I'll go back and answer Bob Hastings question and maybe with that -- so we've spent around C$8 million year-to-date, about C$3 million in the quarter. The Pipeline itself is C$350 million with the largest portion of that spending happening in 2008. More specific than that, it's going to depend. But that's roughly the numbers.

And I think it's fair to say that we've now placed the order for the pipe, so we actually have put those arrangements in place and we're working now to work with contractors as far as lining up the ability to put the pipe in the ground.

Okay, great. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] The next question is from Dominique Barker from Credit Suisse. Please go ahead.

Hi. O&M costs are C$3 million hire due to pension costs. Do you expect that to continue. Is that a normal run rate?

Yes. The pension has been up this year largely a function of discount rate and likely why we put forward a modest increase as part of the rate filing.

Okay. So for the next -- okay. And then I just have a question. If it's something everybody knows, maybe someone can call me back and talk about it offline. I'm a bit confused about Duke's involvement in the Brunswick pipeline. It sounds like they are taking charge of the permitting process and I'm just wondering how if Emera is taking full ownership of the pipeline, how you plan to control the process and why Duke isn't involved financially?

Well, the arrangement we have with Duke is that they have contracted to permit design, construct, and operate the pipe for us. So we have a very tight relationship with Duke over this project and that's the role that they've taken. As far as the ownership of the pipe at this point we're 100% owners and have have not and do not have any plans to that at this point. We'll make those decisions as we go forward. Duke is extremely interested in getting this going because it's helpful getting into gas into the U.S. portion of the Maritimes Northeast pipeline, so it's a good working relationship that we have and that's what it looks like.

So Duke would be paying you a management fee -- or, I'm sorry, you would be paying Duke a management fee?

Yeah, we have a contract with Duke to reimburse for all those various activities.

And the 11 to 14% ROE, is that before or after your management fee?

No, those are the returns to Emera.

And just a question on Bear Swamp, why are you contracting that at all given the purpose of the facility is to take advantage of differences between spot price and an arbitrage situation and pricing that seems to be quite short-term decisions.

We actually see the facility providing several roles in the marketplace. First of all, it's very -- it's a very large facility. It's around 600 megawatts in total. It provides a very good capacity addition to the region, and in fact potentially to other regions. And that's part of why the contract makes sense. The second thing is that it provides, as you say, energy at a differential and so that is more advantageous to some customers than others and that's an important feature.

And then the last is the services that it can provide, ancillary services it can provide to the market. All those various pieces really make up the value propositions that plant brings, and from our perspective if we can contract some of it and leave some of it available for market opportunities, than that's a good combination that helps to secure cash flows, ultimately it helps us to finance the facility and allows us to have a more profitable business. So it works nicely together.

Okay, thank you very much.

Thank you. The following question is from Karen Taylor with BMO Capital Markets.

I want to make sure I heard Nancy's response to Bob right. So it's C$8 million year-to-date on the Brunswick and C$3 million in the third quarter?

Yes.

And the pipeline order that you've placed for Brunswick, is that contingent on regulatory approval?

Clearly, it is a cancellation clause for sure.

And when you're talking about the services, I'm assuming that on Bear Swamp, it's stuff like providing load when you've got too much power in the region, you could sell it to create load, that kind of thing?

That kind of service, but as well it's a very good regulation unit. It's very fast-responding and in that market needs a lot of fast response, so that's a very important part of its opportunity.

Okay. And will you be providing -- as a matter of disclosure since you do ultimately want more of these assets, not less -- the actual after-tax contribution from stuff like this?

Once it gets material, Karen, we always look at our segment disclosure conscious of competitive issues, but providing readers with the right amount of disclosure. So once it gets material or once we have more of these source of units, we would think about disclosing perhaps it or groups of.

And just lastly in terms of seasonal shape of the earnings profile, you'll have to remind my failing memory, did we have our large industrial users out in the fourth quarter of '05?

No, just the last week.

Right. So the seasonal pattern then that we've -- if they're back online, what we've seen as a net margin benefit year-to-date from them not being on the system, given the fuel cost recoveries and the new toll that they've signed is the margin recovery going to be different than Q4 '05?

I would expect on a going-forward basis, the Board in its order has been quite clear in terms of the rate being cost-based and as well, because this rate is a new rate design, in order to ensure that's the case and make sure it functions the way I think everyone wants it to, we've put forth as part of our rate filing that there be a trueup mechanism to ensure that the rate performs as the Board intended.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the meeting over to Mr. Huskilson.

Thank you very much. Before I sign off, I just want to thank everyone for your participation today and thank you very much for your interest in Emera. Have a great weekend.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation and have a great day.