Emera Inc (EMA) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Emera third quarter results conference call. Please be advised that this conference is being recorded.

I would now like to turn the meeting over to Ms. Jennifer Nicholson, Director, Investor Relations and Strategic Development. Please go ahead, Ms. Nicholson.

Thank you. 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 and CEO of Nova Scotia Power; Greg London, Vice President of Finance and Treasurer, Nova Scotia Power, Bob Hanf, President and Chief Operating Officer of Bangor Hydro, and Jeff Cavanaugh, Emera controller.

Emera's third 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 corporate update. Nancy will then review the third quarter financial results in more detail. We expect the presentation segment to last about 10 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 reported in U.S. dollars.

I will take a moment to remind you this conference call may contain forward-looking 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 that this conference is being widely disseminated via live webcast. Now I will turn things over to Chris.

Thank you, Jen, and good afternoon, everyone. First of all, I will like to welcome Bob Hanf and congratulate him on his new role as President and Chief Operating Officer of Bangor Hydro. Bob is already a key member of our management team. He's been with Emera for five years, most recently as our General Counsel. Bob has significant experience working with stakeholders and is well qualified to lead Bangor Hydro into the future.

I would also like to congratulate Rob Bennett for his contribution to Bangor Hydro and on his new role as Executive Vice President, Revenue and Sustainability for Nova Scotia Power. Rob now has the important role of developing and executing on a strategy to help make NSPI a cleaner and greener company. He is also responsible for NSPI's revenue process and customer satisfaction. These areas are key to the success of our largest subsidiary. Thank you both.

Emera's consolidated net earnings increased to $40.9 million in Q3 of 2007 compared to $19.5 million for the same period in 2006. Quarterly basic earnings per share were $0.37 compared to $0.18 in '06. Strong results year-to-date were driven by solid performance from Bangor Hydro and the Bear Swamp generating facility. In fact, earnings were higher in all Emera companies. Nancy will provide further details about the financials.

We saw success throughout our business in Q3, and I will take a little bit of time to update you on some of the highlights from the quarter. Our strategy has been to stabilize our existing businesses and pursue growth opportunities that meet our risk profile. We have made significant progress in these areas this year. Nova Scotia Power is on track to earn within its allowed rate of return in 2007 and plans to hold the line on electric rates in 2008. The Brunswick Pipeline has cleared all regulatory hurdles, and construction is expected to begin this month with an in-service date of late 2008. Construction of the Northeast reliability interconnect transmission line has been completed, and the line will be in service in December as planned.

NSPI continued to work with stake holders in the third quarter to resolve issues related to the proposed fuel adjustment mechanism, and hearings will begin on Monday. As mentioned earlier, Brunswick Pipeline has no outstanding appeals and construction will begin this month. Required construction-related approvals are being secured as needed and all major contracts have now been awarded. At this point, we've refined our cost estimates and now expect the pipeline to cost approximately $400 million Canadian. This is an increase of about $50 million or approximately 14%. The increase is largely due to current market conditions for energy projects, costs have escalated on projects right across North America, and there have also been some design and scope changes. This increase in costs will not change our expected return on this investment.

During construction, we will remain closely engaged with the community and with stakeholders. In the state of Maine, we've now completed the line construction on Bangor Hydro's NRI. The line will be in service in December. We now have approximately $250 million of transmission projects in various stages of development in Maine. There is significant opportunity for transmission development in New England over the next several years. We intend to use our regulatory permitting and construction skills that we've developed in the region to play a role in this further development.

Moving to our investment in the Caribbean, we continue to develop our relationship with our new partners in St. Lucia. The Caribbean is a high growth market, and given the potential returns, we believe there are opportunities for us in this region.

Lastly, I am pleased to mention that Emera was selected by the Conference Board of Canada as a TSX 200 Climate Disclosure leader. Just 15 companies traded on the Toronto stock exchange were recognized by the carbon disclosure project. This project includes a group of 315 investors representing over $41 trillion invested. The goal is improved data transparency about greenhouse gas emissions in order to help investors better understand their investment portfolio. As we move towards a greener future, an important first step is understanding our current environmental footprint. This is really NSPI's accomplishment, and we congratulate them.

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

Thank you, Chris, and good afternoon, everyone. As Jennifer mentioned, our third quarter financial results were released earlier today, and are on the Emera website. I will take a few minutes to review them. As Chris said, Emera's consolidated net earnings were $40.9 million in the third quarter of 2007 compared to $19.5 million for the same period in 2006. Quarterly earnings were $0.37 per share compared to $0.18 in 2006.

NSPI contributed $25 million in the quarter, compared to $12.7 million in Q3 2006. This increase primarily relates to an income tax recovery and NSPI earned $14.2 million before this recovery. NSPI prepared and filed the amended tax returns for the years 2000 to 2004 inclusive. Canada Revenue Agency reviewed and approved the amended filings, which has resulted in the deductibility of previously capitalized expenses. NSPI intends to amend tax returns for 2005 and 2006 using the same methodology and will continue to use this methodology when filing its future tax returns. Reducing NSPI's ongoing taxes payable. As a result of CRA's approval of the amended filing, NSPI has recorded an income tax recovery of $25.4 million, of which 14.6 has been recorded as a reduction of deferred charges, specifically the regulatory asset related to its pre 2003 income tax viability often referred to by us as section 21. The remaining $10.8 million has been recorded as a reduction of current income tax expense. We are pleased that NSPI was able to work successfully with CRA to achieve this tax recovery. It significantly benefits our customers as it will be used to reduce our section 21 deferral and may also enable us to reduce the deferral of fuel costs allowed under NSPI's rate settlement.

Bangor Hydro earned $9.1 million in the third quarter compared to $5.1 million in the third quarter of 2006. This increase relates primarily to revenue received for the NRI from the New England power pool as well as the capitalization of overhead expenses and AFUDC to the NRI project. In late August, Bangor Hydro successfully completed a $50 million U.S. dollars financing using senior unsecured promissory notes. Proceeds were used to pay down $40 million of bridge financing and short-term debt. We were pleased the financing was completed as a blended coupon rate of approximately 6%, very competitive considering the volatility in financial markets at that time.

Emera's other operations contributed $6.8 million to earnings in the third quarter of 2007 compared to $1.7 million in Q3 2006. This increase was primarily due to higher earnings in Bear Swamp caused mainly by increased energy and capacity sales as well as strengthened mark-to-market positions. These positions are primarily associated with Bear Swamp's long-term contract with the Long Island Power Authority. Earnings were also higher in Maritimes and Northeast Pipeline.

That's it for my financial overview; thank you, and we will now be happy to take your questions.

(OPERATOR INSTRUCTIONS). The first question is from Bob Hastings of Canaccord. Please go ahead.

Hi. Just maybe a couple clarification questions on the NRI. I see that interest expense was up, but you still capitalizing your capital costs, so I assumed interest, so can you explain why that would be up from that?

Sorry, Bob, it is Nancy.

Yes.

I think interest is up because our borings have increased as we've increased the amount of the NRI, so the spending has continued, the capital costs have been up and therefore interest costs have been up.

Doesn't that get netted out because you're capitalizing your interest costs until the project comes into service?

There is a netting of AFUDC against that.

Okay. So there is no net impact, that hasn't impacted the earnings negatively, then?

No. That's right.

Okay. And the NRI is -- the cost recovery, what specifically is that regarding from the ISO?

That is how -- the line, we've included a line on the revenue, Bob, and you can see on the Bangor Hydro statement $6.2 million and the $8.2 million year-to-date. That's the way the revenue comes to us for NRI. It comes from NEP Pool It comes as a revenue credit from NEP Pool if you will, so we recorded it on that line.

I am surprised I guess because the project hasn't actually -- it is not actually in service until December, and I would have thought you were just capitalizing everything up until that point and then it kind of starts up, so I am wondering what costs they're recovering for you because you're still capitalizing your CapEx, aren't you?

Yes, Bob. It is Chris. There was a settlement that occurred in New England as a result of construction going on in Connecticut called the Connecticut Lag settlement. That settlement has actually allowed two things to happen. One is that we would capitalize the cost of the project up until it actually goes in service, and at the same time we start our revenue recovery on the project in the June 1st on the year that the project will go in service, so it is a bit of a nuance that happens in the first year relative to that settlement process, and really it is just nor another incentive that the FERC and ISO have put in place for construction of transmission.

So in effect it is really earning a cash return this year?

That's correct.

Okay. Now, when I look out to next year, is it best just to assume that it is earning its regulated return on the equity component of the rate base?

That's right. As you go into next year you'll see a slight drop in earnings as a result of that, but overall if you go from certainly from '06 into '08 you'll see the effect of the transmission line in Bangor's earnings.

So next year expect that to actually have a negative impact from 2007?

Yes, a bit, Bob. We will have other projects as Chris said in his remarks. We have other projects on the books, so we will have some AFUDC in capitalized overhead costs but not to the extent of the NRI, so there will an a slight drop year-over-year.

Slight meaning less than a mill?

No. I would say several million.

Several million?

Yes.

And that includes the depreciation rate that will be kicking in next year?

That's right, so there is a net effect of a bit of increased depreciation as well.

Can you tell me what the depreciation rate is on NRI?

Don't know it off the top of my head, but we can get it for you.

Okay. Great. And given that you opened up the subject that you're doing some other projects and that will contribute, can you give us any more information on those projects?

Just that we've got several projects on the books right now. One we just -- one called the Hancock County project. We just received a Certificate of Public Need and Convenience, and we're also in the process of applying for regulatory approval of a couple of other projects.

Can you give us some idea as to the potential size of these projects?

The total including NRI at this point is about $250 million.

Okay. So incremental 100

- Another $110 million, yes.

And over the next year, two years?

That they'll be in service?

Yes.

Two to three at the most, yes.

Two to three. Okay. Thank you.

You're welcome.

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

Good afternoon. You mentioned that the cost estimate for Brunswick Pipeline increased from 350 to $400 million, and that you had also signed all the contracts regarding this project. I was just wondering if you could expand on the counter parties that you signed the contracts with and the primary reason again for the cost increase from 350 to $400 and if the contracts you signed are fixed-price contracts that would -- that if there is further cost increases would you have to pay for it or would the contractors just make that up on their part?

Okay. You may be stressing my -- this is Chris. You may be stressing my knowledge a little bit. We've awarded the pipe contract and the pipes will begin coming in the new year, and so that is -- that contract is pretty much a fixed price contract. I can't remember the supplier, but a Florida-based supplier.

Okay.

The construction contract signed with Louie Berg who has done a lot of work in this region, and it is a contract where basically the per mile costs are pretty well defined depending on whether you're in easy terrain or rock and those kinds of things, so based on the estimates we currently have, that's actually a pretty narrow window. The first thing I think we need to make sure is clear is that this relationship that we have over this pipeline is a pass through of capital costs, so all the costs that we incur on the project as long as we do that in a prudent manner get put into the basically the rate base of the project and then get passed through in the toll, so we're in pretty good shape relative to the costs of the project, and we also have now narrowed the estimate quite a bit, and we're pretty comfortable that we're in that range of $400 million.

Okay. Thank you very much.

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

Thank you. Just maybe if I can follow up on Bob's question, so when we look at the third quarter results you collected $6.2 million in revenue. Was that kind of what you would expect to be collecting in revenue kind of on a go-forward basis, or is that some sort of special payment?

That should pretty much be the quarterly run rate for revenue on that project.

Okay. And so is it -- when you bring the project into service, will that be for pretty much the entire Q4 or I think you mentioned December, so is it only going to be one month?

That despite the fact that we're still getting AFUDC and capitalizing our overheads, the revenue actually began on that project at the first of June,.

Just when will you stop capitalizing the over head?

Sorry. Yes, Robert, when we bring the project into service.

Is that kind of December 1st?

About December 1st, yeah.

So essentially what you have got is you're almost double collecting right now?

That's fair.

And that would pretty much be the decline we expect you were talking about, Nancy, going into '08?

Yes.

And the other question I had, you mentioned, Nancy just about on ongoing tax benefit from the way you're filing going forward with CRA, you did talk about for the benefit of rate payers, so is it expected that you'll just use that to either maintain rates or keep the rate -- the increase lower in the sense of none of that benefit is going to flow through to shareholders?

Robert, Ralph Tedesco here. The amount of money that we've applied, the bulk of which went to section 21 and paying that down will pay dividends so to speak to customers on a go-forward basis over the next several years as that is amortized. The second component, the current year amount, we'll use to pay down gas deferral to the extent that we're able to do that, so thus far in our earnings we've deferred $3 million of gas consistent with our rate settlements, and/or $3 million of gas costs consistent with our rate settlement, and so we can use moneys to avoid having to defer more or perhaps pay down what's there, but that will depend on how the rest of the year evolves,.

If I am understanding this, Ralph, as we move forward here, any benefit from the way you're filing the tax will either -- well, essentially just will be for the benefit of rate payers one-way or the other?

A significant portion is going to rate payers, the bulk of it is indeed going to rate payers, and I will also mention that we have reviewed our approach with our regulator, and have received very favorable feedback.

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

Thanks. Can you just review what you're seeing on fuel budgets for the next year and how much you're hedged for next year?

Matthew, Ralph Tedesco again. For the next year, we are virtually 100% hedged on all commodities. That would include the solid fuel, fuel oil, and natural gas, and so as we look forward, we're expecting that our outlook is to earn within our allowed return, and obviously fuel is a very important component of that, so we're expecting a fuel budget based on the hedging we've done and the contracts we have that would look somewhat comparable to where we are today.

Okay. Thanks. And with what are you seeing, Ralph, going forward from there if you weren't hedged, especially on coal, some of the commentary recently on water borne coal especially because of what's happening in the development in Asia and so on seeing some price escalation, are you guys seeing the same thing?

Depending on the index, you look at, there is a different levels of escalation for sure helping us offset that is the strength of the Canadian dollar since you'd appreciate the coal is denominated in U.S. dollars, so that's helped countering some of those changes.

And does any of this -- what is your thoughts on whether any of this will matter for earnings because I guess you have a hearing starting you said Monday on the automatic fuel pass-throughs, so what's your outlook for that?

For earnings for '08 --

The pass through mechanism.

Over the last months and weeks we've made an awful lot of progress with the stakeholders participating in the hearing and have substantially narrowed the issues, so we're looking forward to a favorable outcome as the hearings begin.

When might you get a final decision on that?

We would expect that I would say within a reasonable guess would be within 60 to 90 days of the end of the hearing, and that hearing should end roughly mid-November.

Matthew, we're really looking for that adjustment mechanism to start January 1st, '09. That's what our target is right now, and so far that seems reasonable.

Okay. Thanks. Those are my questions.

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

Thank you. Just to close off on the NRI, I know it says in the notes that the contract recoveries are based on $141 million U.S. costs. What was the final cost of the NRI?

Karen, this is Chris. We haven't done the final costing yet, but it is very much in that neighborhood we think within a few dollars were there.

And I don't know if I missed this or what was the amount spent on the NRI year-to-date?

Just a second, Karen. So the NRI project is about $67 million in '07.

Okay.

And project to date at the end of September about $136 million.

Okay. And I understood the Hancock line to be about $20 million. Has that changed?

No. That's about right.

Okay. And you've got more than on top of that, so the cumulative 141 plus 20 and then the difference is going to be over the next two to three years?

Yes, that's correct. That's a good way to look at it, Karen.

Just if you could also talk about the integrated resource plans, so you do have a settlement or a filing, and it is contingent on the UARB allowing you to recover higher costs, cleaner coal. Where does that sit and has it been approved or when will it be approved?

In terms of our strategy for reducing our silver dioxide emissions through the use of low sulfur coal, I think it is fair to say the UARB is comfortable with the strategy that we have in place. That is consistent with what the IRP calls for, fuel switching, and so right now I would say we feel very, very good, in fact I would characterize it as pretty much a done deal.

But they haven't approved it?

There hasn't been what I call a formal approval of the IRP per se, and it is not clear there necessarily will be. It is rather that the -- I think the document will be used as guidance by the Board and others.

Let me make sure I understand because you recommended it or filed it to the Board being the organization with the support of your Board of Directors contingent on the UARB allowing to you recover fuel costs. Are you prepared to go forward on that with a soft covenant after the cost disallowances that we've seen?

I am saying we have very high confidence that those costs will be recovered and deemed prudent, very high confidence.

But nothing in writing or will they use that as a policy document to establish prudency?

If that approach was taken, we would welcome it.

I guess what I am trying to understand is you have a portfolio approach that's been approved by the Board, they've got specific and have had specific performance metrics in the past, so I am surprised that you would pursue something that they're agreeing to without putting it in writing.

Oh, okay. I more clearly understand your question. The procurements that we've made are 100% consistent with our portfolio strategy for 2007. We have made an exception for 2008 that allowed us to stay out. The board has approved that.

Yes.

Part of that strategy of course is beginning to reposition our portfolio to reflect lower sulfur fuels, and as well the board has also approved the Trenton five bag house which is also consistent with a low sulfur fuel strategy of a fuel switching strategy, so all of those things give us significant comfort.

Okay. And then just lastly on Bear Swamp, the mark-to-market was $1.9 million. Is that pre-tax or after tax?

That's pre-tax.

And the after tax number was 1.6? If I read the notes right.

Yes, yep, just find it here. I am looking for it, Karen. I think just apply a tax rate to us, really.

And what tax rate would you recommend?

Probably about 40% -- around 40%.

Just lastly on the run rate for Bear Swamp, is what we saw in the quarter realistic on an ongoing basis or is there seasonality?

I think what you're seeing, what I always said, Karen, is I think 2 to 3 million from the operations is a good run rate by quarter, and so it is hard to predict where the mark-to-market is going to go, so I would say there is 6 million of mark to market in there subject to fluctuation going forward. What we've seen if anything is strengthened in the last quarter or so or the last months since the end of September, but I would say if you're just looking at the pure operations 2 to $3 million is a good run rate.

You said $6 million year-to-date to mark-to-market. Is that pre-tax or after tax?

Yes, it is.

Pre-tax.

Yes.

Okay. Thank you.

Okay.

(OPERATOR INSTRUCTIONS). The next question is from Robert Hope of TD Newcrest. Please go ahead.

Thanks. I was just wondering if you can confirm something for me, the AFUDC that you earned during the quarter, was that mainly NRI and NSPI and not Brunswick, and maybe a breakdown.

There is only a small piece, about $100,000 for the Brunswick Pipeline, so, yes, it is the other entities.

Okay. Great. What about the update on Maritimes to Northeast Pipeline phase 5 open season that included during the quarter? Has there been an update on that?

We don't have an update at this stage. This is Chris.

Great. Finally, if I look at the interest in the other segment it dropped down during the quarter. What were the drivers of that and is this a new run rate?

There is some FX, foreign exchange gains in that number, so it is I guess difficult to predict where the dollar's going to go, but I am just getting it up here. I think that for the next quarter is probably shouldn't be very far off that, a million or so.

Great. That's all my questions. Thank you.

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

Just on clarifying the updated and higher Brunswick costs, are you going to be earning on the full amount or just only going to be earning on the equity component on the base amount?

No. We will be earning on the full amount, Robert.

And just you mention on the Canadian dollar, maybe a strategic question. Are you viewing the Canadian dollar strength as an opportunity to pick up some U.S. assets or are you a little more cautious based on the potential for further appreciation?

I think we're constantly -- this is Chris. We're constantly looking at the market and looking at opportunities, and at this point we haven't seen things weaken too much, but certainly we are encouraged by the strength of the dollar, and we'll keep looking.

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

Thank you very much, everyone. I really appreciate you taking the time to participate today and also your interest in Emera, and I hope you all have a great weekend. Thank you very much.

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