Emera Inc (EMA) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Emera second quarter results conference call. Please be advised that this conference call 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 Glendant], Vice President of Finance and Treasurer of Nova Scotia Power, Rob Bennett, President and Chief Operating Officer of Bangor Hydro, and [Heather Keilor-Hirschman], Emera Controller. Emera's second quarter earnings release financial statements and management's discussion and analysis were distributed earlier in the day via newswire. These documents are also available on our website at www.emera.com. Today Chris will begin with a corporate update. Nancy will then review the second quarter financial results in more 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 Bangor Hydro-Electric, 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 information which involves certain assumptions and known and unknown risks and uncertainties that may cause actual results to be materially different from those that are 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. And now I'll turn things over to Chris.

Thank you, Judy, and good afternoon, everyone. Emera's consolidated net earnings increased to C$34.1 million in Q2 of 2007 compared to C$29.2 million for the same period in 2006. Quarterly basic earnings per share were C$0.30 compared to C$0.26 in 2006. Earnings were higher across Emera's businesses with the exception of Nova Scotia Power, where earnings were slightly lower quarter-over-quarter.

Nancy will provide further financial details in a moment, but I'll take a few minutes to update you on the progress against our strategy. As you know, we recently increased our annual dividend to C$0.91 a share, up from C$0.89. The dividend increase reflects increasing strength across our businesses as our confidence in the sustainability of our earnings builds. Strength like Nova Scotia Power is on track to earn within its allowed return in 2007. The National Energy Board has approved the Brunswick Pipeline. The construction of the NRI is nearing completion, and [Bear Swamp] has made a tangible contribution to earnings so far this year. All these things have contributed to our growing confidence. Nova Scotia Power now plans to maintain its current rates through 2008. We're pleased that NSPI's approach to accomplish this result has been approved by its regulator. And we know price stability is very important to all customers. NSPI is able to hedge fuel contracts and realize gains in the Canadian dollar so that the company can act on plans to avoid a rate application in 2008. In addition, the UARB has approved the deferral of up to $8 million of fuel costs in 2008 if necessary. Holding rates steady for 2008 allows us valuable time to work on issues that are important to the company and its customers, including our energy conservation plan and our work toward a Fuel Adjustment Mechanism, or FAM.

On the topic of the FAM. NSPI requested and was granted and adjournment of the hearing. It was scheduled for June. We believe outstanding issues can best be resolved through constructive dialogue with stake holders. And the UARB has concurred. The hearing is now planned for early November. In June, the Brunswick Pipeline received approval from the National Energy Board and the Governor in Council. An important milestone in the project's development. A leave to appeal has been filed by an intervener, and Brunswick Pipeline is actively opposing this application. This matter is expected to be heard in early fall. In the meantime, the project continues to progress on track and is expected to be in service as planned by the end of 2008.

Bangor Hydro's northeast reliability interconnect is 85% complete and is expected to be in service before year-end. In the second quarter, BHE filed updates to its total project cost estimate with regulatory agencies and the independent system operator in New England. The filing was based on a total product cost for BHE of $141 million as we've previously discussed. The line shares a utility corridor with Maritimes's northeast pipeline and we must spend more than we originally estimated to mitigate the effects of the transmission line on the pipeline. We also had a very wet fall and a late freeze-up, which shortened the construction season and drove up costs. The new project cost was incorporated into rates effective June 1.

Lastly, we continue to develop our relationship with our new partners in St. Lucia. The Caribbean is a high-growth market that requires investment. And we believe there will be near-term opportunities for us in this region. 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 second quarter results were released earlier today and are on the Emera website.

I'll take a few minutes to review them. As Chris mentioned, Emera's consolidated net earnings were C$34.1 million in the second quarter of 2007 compared to C$29.2 million for the same period in 2006. Quarterly earnings per share were C$0.30 compared to C$0.26 in 2006. NSPI contributed C$23.9 million in Q2 2007 compared to C$24.3 million in Q2 2006. The rate increase received on April 1 provided sufficient revenue to offset higher fuel costs and new regulatory amortization. Bangor Hydro earned $4.8 million in the second quarter compared to $2.7 million in the second quarter of 2006. This increase relates primarily to the capitalization of overhead expenses (inaudible) to the NRI project. In addition, effective June, Bangor Hydro began recovering costs associated with the NRI investment. Bangor Hydro is in settlement discussions with the main commission with regards to their distribution rate case. If that process is not successful, there will be a rate case in the fall.

Emera's other operations contributed C$5.4 million to earnings in the second quarter of 2007 compared to C$2.2 million in Q2 2006. This increase was primarily due to higher earnings in Bear Swamp caused mainly by increased energy and capacity sales. Earnings were also higher in Maritimes's northeast pipeline and Emera Energy Services. The capacity payments associated with the Bear Swamp LIPA agreement, which was entered into in 2-1, combined with expected margins on the electricity sales were key to enabling the facility to issue C$125 million in bank debt in the quarter. Emera's half of the proceeds from the debt issue will be used to retire debt as a parent company associated with the acquisition of Bear Swamp in 2005 and for other corporate purposes. That's it for my financial overview. Thank you, and we'll now be happy to take your questions.

Thank you. We will now take questions from the telephone line. (OPERATOR INSTRUCTIONS) The first question is from Sam Caines from Scotia Capital. Please go ahead.

Good afternoon. The--and I know this is in a complex area. The 40.9 million derivatives in a valid hedging relationship that show up in your adjustments and your comment on mark to market adjustments, can you elaborate what went through your P&L in Q2 with respect to that?

So, Sam, it's Nancy. The 40 million you're referring to was in the other comprehensive income?

That 40 million is quote unquote (inaudible) in a valid hedging relationship. And I'm not sure what relationship means. These are adjusted rules. You also commented on mark to market adjustments in your numbers. It's within Emera Energy Services, I'm sure.

Yes, so. Actually the derivatives in the valid hedging relationship, the 40 million that you referred to is FX contract in Nova Scotia Power.

Okay.

Okay. So as a result of the fuel procurement strategy and related FX strategy, Nova Scotia Power has FX contracts that go out to about 2011. And about C$700 million of FX, and the 40 million is the mark to market loss on that.

Okay. And how that rolls backwards into NSPI is adjusted for--I presume--now quarterly. Is that correct?

That particular piece goes through the balance sheet in the other comprehensive income category.

Okay. So it's not touching P&L at all?

No. Doesn't affect P&L.

Separately then, the mark to market adjustment within energy services in the quarter. How much was it positive or negative?

Don't know. We'll have to look that up.

Okay, while you're doing that, I'll switch to something that may be for my ignorance. How is superpeaked defined, as opposed to peak? Talking about peak and superpeak type of relationships with your contract for Bear Swamp. How is that different from peak?

Sam, it's Chris. The only reason we refer to it as superpeak is that it's not the full 16 hours. Bear Swamp can run about 3,000 megawatt hours out a day. And so you can choose to do that in 5 hours, you can choose to do that in 10 hours. Something less than 16 hours.

Okay. So that's the definition. Less than 16.

That's all we're trying to do is refer to it as being something other than what would normally be defined in the ISO as peak.

And what percentage are you at the moment? Superpeak and peak? Or is that confidential?

Well, it's primarily focused on--on--on--a small number of hours during the period.

Okay. I was just thinking with respect to your contract arrangement at the moment.

Well, that's something that's designated by the customer. So the customer will--will ask for what it is that they're looking for from--

So I presume they have flexibility within that contract to switch from one or the other?

Yes, they have some flexibility for sure.

Okay. Thank you.

Sam, it's Nancy. I'll just give the answer to your question. If you look on page 16 of the MD & A. In the table that's entitled Held for Trading Securities Gains and Losses Recognized in Earnings. The Other Revenue amount of C$8 million in the quarter and 16.7 would largely be the mark to market through the P&L of energy services.

Okay. Thank you.

You're welcome.

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

Thanks. I just have a few minor things. Given what you or the regulator has now proved for Nova Scotia Power on the fuel cost side and generally for rates. What would you envision now the effective data of the FAM to be given that the approval that came out earlier clearly says that you're at risk now for 2008 for fuel costs and the related variances on the foreign exchange? So you're negotiating, are we looking at an inservice date or an effective date, if you will, for the FAM of Jan. 1 '09?

Karen, Ralph Tedesco here. With regard to the FAM, we felt we were making--we felt we were making very good progress with stakeholders. And there are an outstanding issue or two that we think we can work through. And rather than go to hearings, we simply requested a postponement.

Right.

Which our regulator commended. So at this point, we're expecting that certainly factor into our outlook for '08, is that we'd earn within our allowed return. And whether there was a FAM or not in '08, we would expect the same thing. And so looking out, I would expect that right now, the furthest out I could see a FAM being in place would be January '09, would be our expectation.

I guess what I'm just trying to grapple with is the approval to waive the policy to hedging policy on the fuel and the foreign exchange related to it. Clearly said that you're on the hook for these costs in 2008, not rate payers. So practically speaking then, the earliest effective data of the FAM would be January 1 of '09. Is that not right?

It could be. And I think you may well be right from a practical perspective. I'm not going to speak for what the regulator may or may not do. But I think that's right. And as we look out at '08, as we suggest in our letter to the regulator, we're virtually fully hedged on solid fuel. And certainly on FX. And we feel pretty good about where we are. And hence the release that we are planning to no longer file in '08.

Okay. And just a couple of other little small things. The other in Bangor Hydro, which looked like cost recoveries, I guess the 5.4 million. Are those related to the NRI? Year-to-date and 2.8 million U.S.--

Karen, where are you?

I'm on page 8 of the MD & A where it says review for 2007 Bangor Hydro Q2.

Yes.

So is that the cost capitalization with NRI? Or what is that?

2.8 on the other line and the 5.4 year-to-date.

Yes.

Again, I think we'll have to look that up and make sure we've got the right number for you.

Okay. And just--

Right explanation.

All right. And just lastly on Maritimes's northeast, there was an increase of $1 million for the quarter, does that reflect any additional cost capitalization relating to project development, expenses in prior periods, or is just that now higher income from the facilities?

Just higher income from the facility. The capitalization was all in Q1.

Okay. Thank you.

And Karen, I think what's important to note there is that the compression platform (inaudible) is now in service. And so there's the volumes on the Maritimes have increased quite a bit as that platform starts to move gas out of the field.

Can you tell me what those volumes were versus Q2 '06?

Yes. I can't tell you exactly, but I know that their average for the quarter was something in excess of 400. They--they--I think that's something that's certainly reported on the Maritimes site, though.

Because, is that--and you'll have to remind me in my failing memory, here. Is that current run rate for volumes on the pipeline in excess of the billing metrics currently approved for the pipeline?

No, I would say it isn't at this point.

So it's still trending below?

No, I think it's actually trending pretty close to where it should be right now. So, I think our run rate on the Maritimes right now is actually going to be pretty consistent for a period as the compression platform continues to operate.

But is that similar to the billing metrics reflected in the overall tolling structure?

Yes, I think it's in the neighborhood. I just don't have the exact number.

Okay, no, that's fine. Thank you.

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

Just on Bear Swamp, you made--did make reference to reversal of mark to market you took late last year. Can you let me know how much that was?

Yes, Robert, it's Nancy. Just give me one second here. So in the quarter, there is--there's a bunch of pieces of mark to market. So if you just look at the quarter, the 6.3, it's about 2 million of operations and then a 4 million mark to market. Some of it is the reversal of that, and some other mark to market things happening just on forward contracts at the facility itself. Some of that is the--is the reversal.

Okay. So the kind of the core operations was about 2 million out of--

Yes. And about year-to-date, the core operations were about 5 million and 3 million of mark to market.

Okay. And then just on energy services, I know there was kind of an outlook because of the upgrades to the [sable] compression that was going to depress earnings this year. I guess we're continuing to see that run ahead of last year. Is that still your expectation? Or is there something else going on? Or does this relate a little bit to Sam's question around the mark to market at energy services?

No, I think for energy services, they've just continued to have a strong year. So we would have said from an EBIT perspective around 10, I think, likely that's going to be closer now to last year's number of 15.

Thanks. Great. Thank you.

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

Thank you. I know you're busy with all these organic growth initiatives, but I'm just wondering if you can give us an update on your inorganic growth strategy. You've had some experiences now in the Caribbean, and are you looking further down there? Are there some other geographies or parts of the value chain that you see some potential opportunities?

Linda, it's Chris. We certainly are still very focused on Greenfield activity so we're looking both in New England in the Maritimes and in the Caribbean now on the Greenfield side. And so that's really what our focus is. Obviously those kinds of projects take a bit of time to put together. But you will see our activity continue to be in that area.

Okay. And so acquisitions you haven't really been looking actively or just don't see pricing there where you want it to be. Or is it lack of deal flow or what?

Well, I think from an acquisition perspective, when we look at it, we think prices are pretty high, so that's definitely a deterrent. I'm not going to say we wouldn't have a niche acquisition here or there, but I would say that the majority of our growth over the next period will be primarily projects that we bring forward. And I think that's--also transmission into New England. Work to continue to grow the Maritimes market and also the potential for some more in the Caribbean. That's really where we are right now.

Great. Thank you.

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

Thank you. Chris, on the Brunswick Pipeline, you did mention about the intervention. And hopefully that won't delay things too much. But are there construction windows that you have to hit it in order to get your targeted inservice date of end of '08? And maybe you could just discuss a little bit what the key milestones are.

Thank you for that, Matthew. Absolutely. It's an aggressive construction schedule that we have. But very, very doable. And so we're in the mode right now where we'll be mobilizing the contractor very soon. We've also made our application for the detailed rooting. And clearly once we get approval with the detailed rooting, that will be a milestone that will cause us to move forward. Things like the pipe delivery. We're expecting pipe to start arriving in the October kind of time frame. And we're expecting to have a full winter construction season. And so if you really sort of map this out, having a good winter is an important piece. We've also been doing some drilling on the floor of the St. John River where we're going to cross, so we can begin to get that design in place and that will be another critical issue. Those various items are coming together. As you know, we have the pipe lined up, we have the contractor lined up, and we've done an awful lot of the work ready to go ahead once we get the approval from the detailed rooting.

And your--what's your best case for getting that now with the intervention on the topic?

Well, we're still expecting that we should be able to get that in the early fall time frame. And we also expect that the intervention will be heard in that same kind of time frame.

Okay. Thanks for that. And just one other question. On the topic of dividends, the company did increase its dividend somewhat recently. And obviously, that's a board decision, but management would have a viewer recommendations on it. So can you maybe just talk a little bit about payout ratio thoughts if you have any. We haven't seen earnings really grow yet although hopefully the outlook is certainly better. So that pushes the payout ratio to the high end. So, of other comparable companies anyways. What's your thoughts on that, Chris?

Well, again, Matthew, I think we've been pretty consistent in saying that we want to keep our payout ratio between 70% and 75%. So we're--that's where our mindset would be on that subject. And we'll continue to be focused there. You said it right the first time, it's a board decision. And we'll--the board will look at that again in November as they always do. And we'll see where we go. But we're feeling good about things right now.

Okay. Thanks very much, Chris.

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

Well, yes, just looking at the St. Lucia opportunities, you said there is--it sounds like there's, not quite a laundry list, but a few that you were looking at. Can you give us any kind of indication as to what different opportunities there might be there?

Bob, I think it's still a bit early. We're really just--we've gotten on the ground. We're actually working with our partners there and looking at opportunities. So it's just a bit early. But things that are in line with our lines of business. So obviously those are the pieces that we're interested in. And it's something we can probably talk about a bit later on.

Okay. Would it be fair to say they're more in the operational side where you'd have direct interest as opposed to just sharing your current percentage interest?

I'm not sure how you're defining that, but again, certainly project-based kinds of things is what we'd be looking at. No different than we're looking at in New England or that we're looking at in the Maritimes.

Okay. So you wouldn't be stuck to the 19% or whatever?

Yes, I see what you're saying. No, it's--it would be outside of that kind of relationship, yes.

Excellent. Okay. And I wasn't sure on the Bangor Hydro in terms of--didn't quite catch what the regulatory side was that you might have to go for--in for rate cases in negotiations. Can you give us a little more color on what's going on there?

Bob, maybe I'll just let Rob Bennett go for that one.

Thank you.

The rate case situation in Bangor Hydro's going on right now and there are really two paths to be followed. One is the traditional litigation path and the other is the settlement path. And we're in the middle of the settlement path at this point and things are looking quite positive. We expect to be able to report further on that in the early fall.

Are there any particular issues or sticking points to this point?

Not at this time, no.

What--in terms of what you're requesting, are we--are you looking for something that would be more something close to where we are now or there might be further opportunities for earnings growth?

We're looking to stabilize the business. At this point, I think there is some up side there, but we're continuing to ask for 11.25% and 50% equity thickness.

Okay. With some kind of incentive system, as well?

It's uncertain at this time whether or not there'll be an alternative rate plan in place.

And I think, Bob, it's important to look at Bangor in the three pieces. So, this is about the distribution rate case. And so whether we end up in a performance base rate plan, that's where we came from. Whether we end up in one, I think that's still an open question. And so, we'll see how the negotiations go. We also, the (inaudible) We settled that, I think just about a year ago now. Or a number of months ago, anyway. And then the transmission piece in Bangor is growing as a result of the projects we have on the go. And certainly the NRI is nearing completion, but we have other projects we have on the go right now, as well. And so as those projects begin to go into construction and so on, they'll also produce earnings growth for Bangor.

Okay. Thanks. And just one last one on the regulatory front in for Nova Scotia Power Inc., I thought that was great you could avoid that rate case for next year. But I believe there's still something going on in terms of a review of your operating costs? An independent review?

Yes, Bob. Ralph Tedesco. The board has asked that we look at op--that they look at our operating expenses. We feel that our expenses compare very favorably indeed. Much of our expenses have been previously--been reviewed by the board, including our transmission and distribution system, our pension expenses, [TND] expenses, a whole variety of things. Overhead expenses. And we benchmark ourselves, as well. And certainly the regulators' obligation is to look at those things. We feel that they're in very, very good status. The vast majority of them will benchmark first quartile.

Yes. And I appreciate that your rates are one of the lowest in the area of the country. But I just wondered, does that present any potential, if they were to find something or disagree with anything for whatever reason, would that have--could that potentially impact your current settlement for next year? Or would it actually be for 2009?

My guess right now given what we understand the timing of it to be is it's probably an '09 issue.

Okay. Great. Thank you very much.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Huskilson for closing remarks.

Before Chris does that, I'll just answer Karen's question from earlier. The other on Bangor, was, it's largely [AFUDC]. There's some other things in there, but that's what it is.

Okay. And just I'd like to thank everyone very much for their participation today and for their interest in Emera. And I hope everyone has a great weekend and a great summer. Thank you all very much.

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