Emera Inc (EMA) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Emera first quarter results conference call. Please be advised this conference is being recorded. I would now 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 the call today. Joining me from Emera are Chris Huskilson, President and Chief Executive Officer; Nancy Tower, Chief Financial Officer; Ralph Tedesco, President and CEO of Nova Scotia Power; Greg Blunden, Vice President Finance, and Treasurer of Nova Scotia Power; Bob Bennett, President and COO of Bangor Hydro; and Heather Keeler Hirschman, Emera Controller. Emera's first quarter earnings release, financial statements, and management's discussions and analysis were distributed earlier today via Newswire. Those documents are also available on our website at www.Emera.Com. Today, Chris will begin with a corporate update. Nancy will then review the first quarter financial results in more detail. We expect the presentation segment to last about 15 minutes, after which we will be happy to take questions from analysts and investors.

Please note that all amounts are in Canadian dollars with the exception of Bangor Hydro Electric where segment results are recorded in U.S. Dollars. I will take a moment to remind you that this conference call may contain forward-looking information which involves certain assumptions and known and unknown risks and uncertainties that may cause actual results to be materially different from 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 this conference is being widely disseminated via live webcast and now I'll turn things over to Chris.

Thank you, Judy and good afternoon, everyone. Emera's consolidated net earnings were $39.7 million in Q1 of 2007 compared to $43.6 million for the same period in 2006. Earnings were lower in Nova Scotia Power by $11.3 million quarter-over-quarter, primarily because the utilities 3.8% rate increase for 2007 will not take effect until April 1, or it did not take effect until April 1. The NS power reduction was partially offset by higher earnings across the rest of Emera's investments.

I'll leave the financial details for the quarter to Nancy and take a moment to update you on important progress we've made across the business this quarter. This quarter bears finalized a capacity agreement with Long Island Power Authorities, or LIPA. Contracting a portion of Bear Swamp has been a goal since we acquired the facility. This power purchase agreement with LIPA runs for 14 years. Bear Swamp will provide 345 megawatts of capacity to May 31, 2010, which represents about 55% of what the facility has available. From 2010 to the end of the PPA, the capacity provision decreases to 100 megawatts. In addition, Bear Swamp will provide LIPA with just over 12,000 megawatt hours of peak energy a week at an escalating fixed price. That represents approximately 35% of Bear Swamps available energy.

As you know Bear Swamp is a pump storage facility and typically pumps water uphill to its reservoir during off peak hours and generates electricity during peak pricing periods. Bear Swamp has contracted with its parent companies Emera and Brookfield Power for the power supply necessary to produce the requirements of the LIPA agreement. Emera is actually managing its position with respect to Bear Swamp power supplies. 80% of the power supplied to Bear Swamp for 2007 is fully hedged with the balance actively being managed by Emera Energy. The longer term position is monitored daily by Emera Energy and our middle office and exposures are managed against overall returns for the client.

Brunswick pipe took an important step in the regulatory approval process in the quarter. The National Energy Board issued its environmental assessment report and the main finding is that the project is not likely to result in significant adverse environmental effects. Brunswick Pipe's application included important environmental commitments and the NAB made some additional recommendations to its report, all of which match project expectations. The next step is for the Federal Government to prepare a response to the NAB environmental report, which will require cabinet approval. All of these materials will be considered by the NAB as it decides whether to approve the overall pipeline application. We continue to expect the regulatory process to be complete by mid year and should the NAB approve the pipeline, it is expected to be in service by the end of 2008.

On the subject of construction projects, the Northeast reliability interconnect is now 60% complete, and is on schedule to be in service by the end of 2007. We have had an increase in our estimate of the total cost of the project which is now forecast at between 135 and $140 million. The lions share of the utility corridor with the maritimes Northeast pipeline and we are are spending more than originally estimated to mitigate the effects of the line on the pipeline. We also had a very wet fall and a delayed freeze up which shortens the winter construction season and increased construction costs. Bangor has filed this information with its regulators and with ISO New England. The project cost will be Incorporated into rates effective in June.

Emera Energy Services completed a contract to manage Canada's largest combined cycle gas fired power plants. The new Greenfield energy center, a 1010 megawatt facility located near Sania, Ontario is expected to be in test operations this Summer. Emera Energy will act as agent for the facility and manage approximately 140,000 MMBTU's per day of natural gas purchases and the associated power sales. This is a significant transaction because it expands our energy management business into Ontario.

Finally, I'll remind you that Emera's 2007 annual general meeting is next Tuesday in Halifax at 2:00 p.m. Atlantic. We will be webcasting the meeting for those of you who would like to listen in. Later next week, I'll be looking forward to attending the Lucelec annual general meeting. We continue to develop a relationship with our partners in the Caribbean and look forward to new opportunities. With that I'll turn things over to Nancy for the detailed financial update.

Thank you, Chris, and good afternoon, everyone. As Judy mentioned, our first quarter financial results were released earlier today and are on the Emera website. I'll take a few minutes to review them. Emera's consolidated net earnings were 39.7 million in the first quarter of 2007 compared to $43.6 million for the same period in 2006. Quarterly earnings per share were $0.36 compared to $0.40 in 2006. Lower earnings at Nova Scotia Power behind the decrease in consolidated earnings.

NSPI's earnings contribution was $26.1 million in Q1 '07 compared to $37.4 million in the first quarter of 2006. Sales were higher with NSPI's largest industrial customer back in operation after being shut down for most of last year, however, the increased sales were served by higher marginal cost production. Natural gas resale margins were also reduced quarter-over-quarter, as a result of market conditions. The net result is that after-tax electricity margin was $7.5 million lower this year. The fuel cost changes were not unexpected and were a key driver behind NSPI's application for rates in 2007. New rates came into effect at the beginning of this month so electricity margins will be stronger for the rest of the year. I will also note that NSPI's operating maintenance and general expenditures were about $2.5 million higher after-tax quarter-over-quarter. This is primarily due to higher storm costs and increased plant maintenance.

Despite the first quarter uptick, NSPI expects OM&G for 2007 to be consistent with 2006. Nova Scotia Power continues to work with stakeholders on the development of a fuel adjustment mechanism. The FAM is key to improving the consistency of NSPI's returns. Three technical conferences with stakeholders have been held and a hearing is scheduled to begin June 18.

Bangor Hydro contributed $6.8 million to consolidated net earnings this quarter compared to $3.7 million in 2006 primarily due to the capitalization of overhead expenses and allowance for funds used during construction to the Northeast Reliability Interconnect project. Also, colder temperatures quarter-over-quarter increased residential revenues. Bangor Hydro is in the midst of its distribution rate case, a decision is expected in the Fall.

Emera's other operations contributed 6.5 million to net earnings in Q1 2007, compared to 2.5 million in Q1 2006. Emera Energy Services, Maritime Northeast and Bear Swamp all reported higher earnings. Energy services benefited from cold weather in the Northeast, which increased its natural gas marketing opportunities. In the FERC approval of the expansion of the U.S. Portion of the Maritimes Northeast Pipeline, allowed it to capitalize certain costs in Q1 2007 which had been expensed in prior periods.

Finally, I'm sure you have all enjoyed the changes to our financial statements as a result of new classification and measurement requirements for financial instruments dictated by the CICA. We've tried to explain these changes clearly. Essentially the new accounting rules affect three elements of Emera's business. Hedges that we use to manage risk of fluctuations and commodity prices, interest rates in foreign exchange, Nova Scotia Power's natural gas supply contracts and forward sales of electricity in Bear Swamp. In some instances the new accounting requirements result only in reclassification of amounts to New Balance sheet accounts. However there is also a new requirement to record the fair value of the effective hedges and other items as assets and liabilities on the Company's balance sheet. Implementing that new treatment added $194 million to Emera' s total assets as of January 1, with a corresponding increase on the liabilities and shareholders equity side of the balance sheet and essentially no income statement impact at that date.

For the three months ended March 31, the net effect of the implementation of these changes is a $700,000 reduction in net earnings which is relatively immaterial. That's it for my financial overview. Thanks, and we'll now be happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) The first question is from Karen Taylor from BMO Capital Markets. Please go ahead.

Hi. I have just two quick questions. First on the NRI, you said the costs are 135 to 140. Can you just, in February I think we talked about the cost being 110 to 120. Are those the right numbers and are you absolutely certain that you're going to get cost recovery under the terms of the previously issued decision is the first question? And then the second question relates to the fuel cost issues in the first quarter and whether you can make those up.

Well, hi, it's Rob Bennett here in Bangor. On the question on NRI costing, yes, the final cost estimates now are in the range of 135 to 140 million, and that is an update from last Fall's cost estimate due primarily to the experience that we did have during the wet season of construction and the learning that we've had involving the cost of the AC mitigation prior to the project.

Yes.

So those are the most up-to-date costs and we expect those to be much more accurate later in the summer but we do not expect them to change that much.

And what about recovery?

The recovery is quite straightforward with the FERC formula including all prudently incurred costs. We expect to make that filing this June, and all of those additional costs will be recovered.

Versus how you're going to accrue when this thing goes in service, do you anticipate the FERC decision to authorize any recovery before it's in service or are we going to be accruing some portion of the contribution based on the higher amount?

We'll be following the protocols that FERC set out with the Connecticut lag settlement agreement. So that means that we'll start filing for the recovery next month or sorry, in June.

So does that mean it will be in place then and you'll accrue 100%?

Yes.

Okay. Thank you.

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

I guess maybe just following up a little bit differently on Karen's question, or the second question on the fuel makeup in NSPI, just generally do you expect to earn within the allowed range given what we saw in Q1?

Ralph Tedesco here, Robert. The fuel result in Q1 was not unexpected, and it's been built into our thinking, and our objective continues to be to earn within our allowed return.

Okay, and then just last question, on the other segment, obviously very strong results in Q1, and with respect to the Q4 outlook and what you saw for 2007, it looks like you pretty much booked more than the entire year in Q1 even if you adjust for the Bear Swamp mark-to-market last year. How has your outlook changed I guess with respect to 2007?

Robert, it's Nancy. We did have strong earnings in other in the quarter, but there are a couple of things, there are a couple of one-time things in there, but I'll try to give you some general perspective on where we think that's going to be. I think what we've already said is for Emera Energy, for example, earnings in the 5 to $10 million range or EBIT is a good number. I realize that we're already at the $5 million range for 2007 already, but I don't think it will be as high as last year. So I think closer to the ten is probably where it should be, and without going into the detail of all of the other segments, I would say if you look at other in its entirety it, probably several million dollars higher than 2006 is about where we should be or where you should be looking for, subject of course to any changes in mark-to-market. So I hope that's helpful.

And I guess just as you mentioned mark-to-market, did we see the whole mark-to-market loss that Bear Swamp had in Q4? Did that all reverse in Q1?

Yes, it did.

Okay, great. Thank you.

Thank you. The next question is from Linda Ezergailis from TD Newcrest, please go ahead.

Thank you. Maybe you can give us an update on your integrated resource plan, NSPI, and any sort of update on environmental compliance with new regulations.

Sure. I'd be happy to do that, Linda. With regard to the integrated resource plan, a report will be provided to the UARB, our regulator in June. Our expectation is that we'll see a emphasis on renewables, I'm sorry, on demand side management. We also expect there will be an emphasis on renewables as well, and a continued interest in controlling emissions.

The other thing that I should probably add with regard to the IRP is that a constructive part of it is that all the stakeholders have been working I think very well together, so I've also been encouraged by that as well. With respect to the more recently, the more recent announcement out of Ottawa, here again, the Company has been preparing itself for a situation of lower emissions both with SO-2 and NOX, as we've been undertaking reductions beginning 2005 of about 25% SO-2 and more recently, installation of technologies to reduce nitrogen oxides by between 40 and 50%.

With respect to greenhouse gas emissions, there again, part of our strategy has been the introduction of renewables and as, on a very very preliminary basis, because as you can appreciate, the information from Ottawa is still relatively new. It appears that we would be looking at a reduction in carbon dioxide emissions of between 1 and 1.5 million tons, beginning 2010.

And all of the costs associated with complying with that obviously would be recovered in rates or added to rate base or something like that?

That would certainly be our expectation and thus far in terms of cost for fuel switching, those have been recovered and as well, the low NOX installations that we've done have also been built into rate base.

Okay, thanks. Moving on to your other segment, for the maritimes and Northeast pipeline, how much of the amount capitalized during the quarter was related to prior periods?

Your question is how much that we--?

Expensed sorry or no, capitalized.

So the difference year-over-year was about $2.4 million. If you just look at the earnings, $2.4 million, a good portion of that I would say the material portion of that was the capitalization of costs that have been previously expensed.

Okay, and those are all related to prior periods?

They are all related to prior periods.

Okay, thank you.

You're welcome.

Thank you. The next question is from William Young from Longbow Capital. Please go ahead.

Good afternoon.

Good afternoon.

Hi. Just to follow-up a little bit on the previous question, on mission controls. Are there actual specific limits for NOX and SOX that you have to meet by 2010 or 2011 or is it just you just have to reduce the emissions by a certain percentage?

There are provincial regulations today that would cause you to have to meet NOX targets and SO-2 targets in our 2009, 2010 time frame.

Do you know what exactly those provisions are?

Sure. For sulfur dioxide, it's roughly by 2010 a 50% reduction as I've indicated we've already achieved half of that and then we have until 2010 to achieve the other half. For nitrogen oxide, it's roughly a, I'm going to say about a 30% reduction in our total nitrogen oxide emissions.

Those are off of 2005 levels?

For the sulfur dioxide, I think -- I'd have to verify this but I think the base year for sulfur dioxide I think is the year 2000 on both NOX and SOX.

Just another question, can you expand on return of the large industrial customer, earlier this year, when did the customer return to operation and how does that reflect your earnings from April? Because I know in the rate case when you filed it, you assumed that this customer would return to 2005 levels of operation before it had shut down in 2006 so I was just wondering, is that the case as you look forward after April 1, of this year?

The customer returned to service late last year, and like any large facility I think coming back into service ramped up operations over a period of time, and I think we're now at a point where we're seeing more normal operating levels and some of that is what you're seeing in our Q1 fuel. So you see an increase in revenues associated with sales to that customer and a significant increase in fuel costs. So as I say, none of which was unexpected and in part why we had filed.

Okay, thank you.

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

Thanks. We're seeing an escalation in cost of all types of energy infrastructure and I guess it played through in your electricity transmission line. If that happens for the Brunswick Pipeline, what is the risk factor and who pays for that? Does that affect your return potentially on that project?

Matthew, it's Chris. No, it doesn't. Part of the contract that we signed with Repsol really called for a pass-through of the capitalized costs on the project, so it certainly will work hard to make sure that we get that project to as low a cost as possible, but at the end of the day the contract protects us from that issue.

So you have no risk to the construction cost on that project?

No. That's right. We just have to do things in a business-like fashion as we normally would have to, but other than that, no other risks.

Okay. Switching to the recently announced contract to manage a gas fire plant in Ontario, that in itself doesn't sound like an ends to a strategy in Ontario. What's your broader interest in the province, Chris, from a strategic standpoint? Is it in building plants under RFP or possibly acquiring power plants or how would you describe it?

Well, Matthew, I think maybe going a little far at this point, but we think that Ontario is an important market in North America. It's a market that we've looked at several times and at this point in time we think it's important that we put a toe in the market and see how things go. From an overall perspective, it's hard to ignore the Ontario market.

Okay, and I guess just last question, just more broadly on business development. You had talked about more acquisitions and then started to build things. Are acquisitions now on the back burner that you're finishing up these transmission lines or is that still something you're looking at?

Well, we're always looking and it certainly that we would stay focused on looking at acquisitions, but as we've said, I think recently, we're seeing the North American market at a pretty high price right now from an asset perspective and so that's going to mean that we'll have a lower probability of doing acquisitions. Maybe some niche acquisitions may still happen, but we will see ourselves developing more projects over time.

Thank you very much.

Thank you.

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

Just a quick follow-up to your answer to my question to Robert Kwan. It's Friday. Were built into your budget for the year, so the allowed ROE is 930 to 980 roughly and rates reflect 955. Can you still hit the midpoint of the range or are you talking the lower end of the range?

At this point we're staying at the range.

Okay. Thank you.

Thank you. The next question is from Sam Caines from Scotia Capital. Please go ahead.

Question is for Rob. July 1, '07 it will be the fifth year of rate reductions under the ARP program. What happens next and two, along with the amortization change, it looks like a materially lower number Q1 year-over-year, 2.6 million versus 3.8 million, what's happening with amortization there?

The amortization is following the schedule as was expected, and as far as the rate change this year, under the alternative rate plan, there will be a 1.5% reduction in distribution rates in our service territory, in July -- in June, sorry.

And then what happens a year from June?

We're in the middle of a rate case that we will have resolved in the Fall, and we'll have an answer to that near the end of the year.

Okay.

New rate construct going forward.

Any preliminary framework or is it wide open?

It's wide open at this point. We're working through a traditional rate case format but we're always open to negotiations which we would expect will start shortly as we're in the part of the process where the Commission is now considering our submission and we'll release a bench analysis next week.

Thank you, Rob. A general question for this series of changes to mark-to-market. I understand of course Energy Marketing might have something mark-to-market every quarter. Bear Swamp too I'd speculate. How about the contract in Ontario. Do you have any type of exposures there under whatever agreement you have made and how do the economics work in Ontario?

Sam, it's Nancy. There is no mark-to-market effect from that contract. It is just, it is a management contract. We are not taking any fuel risk.

Okay.

So there's no mark-to-market effect on that.

In Ontario. But with respect to every other component of your business, what can fluctuate quarter-over-quarter?

So you're right. We've been using mark-to-market accounting and energy services of course for some period of time.

Yes.

But because of the type of contracts we have in place and because of the back to back nature of their business, we see fluctuations on the balance sheet but not through the income statement. Nova Scotia Power will see some mark-to-market effect from one other natural gas contract that was a large portion of that, but there is an offsetting because we have regulatory accounting for that, there's an offsetting liability piece to it, and so again, not an income statement effect.

Okay.

Bear Swamp contract though, and the associated contracts there will receive mark-to-market accounting and we expect to see some fluctuation in that going forward.

Okay, thank you.

You're welcome.

Thank you. (OPERATOR INSTRUCTIONS) The next question is from Juan Plessis from Canaccord Adams. Please go ahead.

Thank you. At NSPI, what was the full impact on revenue of the colder weather in the quarter?

We'll take a look at that if you'll give us a moment. It was $9 million.

$9 million?

Yes.

Okay, and was the cold weather a net positive or negative to earnings after considering the increased storm costs?

Well, the weather probably would have been I would say almost neutral because of the larger customer coming back out of change in our marginal cost profile.

Great. Thank you very much.

Thank you, there are no further questions registered. I would like to turn the meeting back over to Mr. Chris Huskilson.

Thank you very much, and before we go, I just want to thank you for your participation today, and your interest in Emera and I hope you all have a great weekend. Thanks a lot.

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