Emera Inc (EMA) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Emera fourth 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 of Investor Relations and Strategic Development. Please go ahead.

Thank you. Good afternoon 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 Blunden, Vice President Finance and Treasurer, Nova Scotia Power; Rob Bennett, Executive Vice President, Revenue and Sustainability, Nova Scotia Power; Bob Hanf, Chief Operating Officer of Bangor Hydro; and Jeff Cavanaugh, Emera Controller. Emera's year-end earnings release financial statements and management's discussion and analysis were distributed earlier in the day via newswire. These documents also available on our website at www.emera.com.

Today Chris will begin with the corporate update. Nancy will then review the fourth quarter financial results in more detail as well as provide an overview of the full year. We expect the presentation segment to last ten to 15 minutes. Afterwards 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 that this conference call may contain forward-looking information which involve certain assumption 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. Good afternoon, everyone. First let me start by saying that my team is proud of the record results we have achieved this year. Our core utilities made progress on the regulatory front and had solid earnings. Collectively, we have laid the ground work with greenfield projects to create earnings growth in the coming years. Consolidated earnings were C$151.3 million for the year ended December 31st compared to C$125.8 million in 2006. This increase included mark to market accounting gains in Bear Swamp of C$14.6 million. Excluding in these accounting gains, 2007 was still our strongest year yet. I will leave the financial details of the year and the quarter to Nancy.

Last month, the Emera board of directors increased the annual dividend from C$0.91 to C$0.95 per share. This C$0.04 increase on top of the C$0.02 increase in July reflects the board's confidence in Emera's strategy and the sustainability of our earnings. Greenfield projects currently underway, including Brunswick pipeline and new electric transmission in New England, will have a significant effect on earnings beginning in 2009. We continue to explore other opportunities both in the Northeast and the Caribbean which we anticipate will bring additional growth.

As you know, construction started on Brunswick pipeline in late November and is progressing. The important horizontal direction drill to cross under the St. John River began recently and our pipe has been arriving by the trainload since the beginning of the year. The contractor is having good success in attracting the resources necessary to execute the project and continues to target November 2008 for completion. The Northeast Reliability Interconnect in Maine went into service in December as planned. This project generated significant earnings for Bangor Hydro in 2007. As we previously stated, we have approximately $110 million of new transmission projects in various stages of development in the state of Maine. Transmission development will be a priority in New England over the next several years as states attempt to meet energy needs and renewable portfolio standards by importing clean energy from northern New England and Canada. We intend to use the regulatory permitting and construction skills we have developed in the region to play a role in this development.

We have also recently signed a memorandum of understanding with Newfoundland and Labrador Hydro to determine the feasibility of bringing energy from the lower Churchill project to Nova Scotia and New England. Emera is well positioned to evaluate this new renewable project, which leverages our experience in Nova Scotia Power, Bangor Hydro and Emera Energy Services. In the Caribbean, we continue to explore further opportunities to build on our investment in Lucelec. Our goal when we made the small investment was to determine if this was a viable place for us to invest further. We have explored our options in the region and believe opportunities exist for us to deploy additional capital, especially in generation development. As I have mentioned, we have made progress at our regulated utilities in 2007. Nova Scotia Power's fuel adjustment mechanism was conditionally approved in December and will be working with stakeholders over the coming year to insure we meet the UARB's requirements for final approval expected in December '08. At Bangor Hydro, the main Public Utilities Commission approved our stipulation for a rate increase of approximately 2% in distribution delivery rates, effective January 1, 2008. With that, I will turn things over to Nancy for the detailed financial update.

Thank you, Chris. Good afternoon, everyone. As Jennifer mentioned, our fourth quarter and annual financial results were released earlier today and are on the Emera website. I will take a few minutes to review them beginning with the results for the quarter.

Emera's consolidated net earnings were C$36.6 million in the fourth quarter of 2007 compared to C$33.5 million for the same period in 2006. Quarterly earnings per share were C$0.33 compared to C$0.30 in 2006. Earnings increased quarter-over-quarter due mainly to higher earnings in our other segment. Earnings increased to C$4.7 million in Q4 2007 from a loss of C$1.7 million in Q4 2006 primarily due to Bear Swamp's higher mark to market accounting gains and higher energy and capacity sales. The mark to market gains reflect our long-term contract with the Long Island Power authority and will reverse over the life of the contract. Bangor Hydro reported earnings of $6.7 million in the quarter compared to $5.3 million for the same period in 2006 due to higher revenue and capitalized cost associated with the NRI project. These increases were partially offset by Nova Scotia Power, where net earnings decreased to C$25.2 million in the fourth quarter compared to C$29.9 million in 2006. This decrease was caused primarily by higher storm restoration costs due to the effects of the severe post-tropical storm Noel. 2006 earnings also included C$9 million from an insurance settlement. This was partially offer set by refund interest received on the tax settlement which was recorded in the third quarter.

As Chris noted, Emera's consolidated annual earnings were C$151.3 million compared to C$125.8 million for 2006. Earnings per share were C$1.28 excluding the effect of the mark to market accounting gains at Bear Swamp and C$1.36 of that is included. This compares to earnings per share of C$1.14 in 2006. Nova Scotia power earned C$100.2 million in 2007 compared to C$104.3 million in 2006. This slight decrease was caused primarily by a reduction in electric margin, higher spending on storm response, and increased regulatory amortization. Bangor Hydro's contribution to earnings was $27.5 million in 2007 compared to $16.8 million in the prior year. As in the quarter, this increase was due to higher revenue and capitalized costs associated with the NRI project. This was partially offset by higher income taxes and the effects of a strong Canadian dollar. Our outlook is for a slight decrease in earnings at Bangor Hydro in 2008.

Other operations contributed C$23.6 million to annual net earnings compared to C$4.7 million in 2006. Again, this increase was primarily due to Bear Swamp's higher mark to market accounting gains and higher energy and capacity sales. The Maritimes and Northeast pipeline also contributed higher equity earnings and Lucelec provided C$2.2 million, which was new in 2007. Corporate costs increased quarter-over-quarter to C$4.8 million in Q4 2007 from C$3.6 million in Q4 2006 and increased year-over-year to C$14.4 million from C$9.6 million in 2006, primarily due to increased business development costs and depreciation. Consolidated net cash provided by operating activities was C$351.4 million for the year ended December 31st, 2007 compared to C$332.5 million in 2006. Cash provided by operating activity increased to C$198 million in the fourth quarter of 2007 compared to C$93.4 million for the same period in '06. The increase in the quarter was caused by settlement of a receivable from a natural gas supplier and receipt of cash from the tax settlement in NSPI. That's all for my financial overview. Thank you and now we will be happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) There will be a brief pause to wait for questions. Thanks for your patience. Our first question is from Linda Ezergailis from TD Newcrest. Please go ahead.

Thank you. I have a question with respect to Nova Scotia Power's fuel costs. I guess one of your fuel suppliers has provided notice it is suspending 2008 shipments. Can you give us some more color as to what percent of your fuel supply -- of Nova Scotia Power's fuel supply could potentially be affected? And what is the item of contention within the contract according to the supplier and what will be the regulatory treatment of this if there is an issue given that the FAM doesn't kick in until 2009?

The notice that we received from the fuel supplier is essentially that they wish to renegotiate the contract we have. At this points we are in the midst of trying to negotiate a mutually acceptable outcome. The change in our portfolio is reflected in the MD&A where you will note that 80% of our solid fuel portfolio is currently hedged. That reflects this change.

So it is really 20% that is unhedged or?

Yes, you can think of it in those terms. I would tell you at this point it is a little too early in the year and a little too early in terms of our discussions with the fuel supplier to provide a reasonable estimate of what this may or may not mean.

And why do they think they can renegotiate a contract? Was there an index embedded within the contract? Was it a fixed price contract or what's going on there?

At this point, all I can tell you is what the supplier has informed us and that is that they wish to renegotiate the contract. The contract does not provide for such a provision.

And what jurisdiction of law does this contract fall under?

It would be Nova Scotia.

Okay. So it could potentially be litigated then?

Potentially. Our goal is to try and reach a mutually agreeable solution.

And the regulatory treatment of this?

One of the thing that is we take some comfort in is that these procurements have been undertaken in full compliance with our fuel procurement policies and procedures that have been approved by our regulator.

But that doesn't protect you in 2008 when you have no FAM.

We think that as I said, it is early in the year to see how this plays out. We have informed our regulator. They're aware of the issue and as I say it is just really too early to say.

Okay. Now, this is a little bit more of a pedestrian question, but could you let us know what the average or someone -- I guess maybe Jen, the average number of shares both on a basic and diluted basis was for Q4 of '07? We couldn't find it in the release.

It is 111 million. Page 29 in the MD&A. So the share data, is that what you are looking for, Linda?

The average number of shares in Q4?

In Q4. We will get that for you.

We will get that for you and give it to you in a second.

Okay. Thank you.

Thank you. The following question is from Bob Hastings of Canaccord. Please go ahead.

Thank you. The cost of the storm, do you have an estimate of that?

Bob, Ralph. I assume you are referring to the December storm.

Yes.

That storm was roughly C$7.3 million.

So your expenses would have been down year-over-year if it wouldn't have been for that?

Fair statement.

Okay. Now, that's a pretax number?

Yes.

Okay. And maybe something more broader in terms of outlook, there's been talk of the energy hub and the Maritimes and you have been looking at a transmission -- potential transmission plan. We see talks of a new nuke in New Brunswick, where do you think we are sitting in terms of major decisions being made, partners and what do you think the timeframe is now? Are we closer to getting anything resolved or being able to see better?

Bob, it is Chris. We think that 2008 is the year in which we will work our way through a lot of these issues that you are talking about. We made a fairly substantial presentation to the Planning Advisory Committee in ISO New England back in December. We would say that was well received and we have also continued to work in the market with various players and so on. So all of these things you are talking about, we see as very encouraging relative to this. ISO New England has said they want to figure this out over the next 12 to 18 months. So we're encouraged by that as well. It's the kind of thing that we will have a lot better understanding of as the year unfolds.

Is that presentation available?

I believe it is. I think it is. It should be on the ISO website, I think.

Bob, I can send it to you if you like.

That would be great. I missed that. Thank you.

Okay.

Thank you. The following question is from Matthew Akman from Macquarie. Please go ahead.

Thanks very much. I have a question, first on the Brunswick pipeline and the range of ROE you expect to achieve on that is 11 to 14% you are saying. What are some of the swing factors in that ROE and I guess what equity ratio is that expected to be on?

It is Nancy. The equity, we have used approximately 40% equity, the 11 to 14%. The 11 to 14% is really the range over the contract. So 11 in the early years building to 14% in the later years of the contract.

Is there anything in particular that could create volatility in those achieved returns other than capital costs?

Not really, not that we are seeing at this point.

Is it volume sensitive?

No, no. It is a taker pay, a sender pay contract and the toll is fixed. And it is not dependent on volume.

Okay. Thanks. I want to move on to Bear Swamp for a second. There was an auction for capacity in New England recently and I want to know, I guess whether the outcome of it met your expectations roughly. It was pretty much on the very low end, I guess of what could have come out of it, and so does that affect your expectations for Bear Swamp going forward and your contracting strategy with Long Island Power?

Matthew, it is Chris. That actually is, it is along where our forecast would have been for that time period. We would say that's expected.

Okay. Thanks very much.

Thank you. The following question is from Robert Kwan from RBC Capital Markets.

Thank you. Just wanted to ask about the outlook section for the other, and the statement '08 is expected to be consistent with '07 after you take the Bear Swamp mark to market out. I guess you're going to book increasing AFUDC on Brunswick in '08 and if I can recall, '07 was supposed to be negatively impacted by increased Sable Compression. I am wondering whether you expect the Sable Compression to spill into 2008 or is something else expected to decline in the segment?

What we really saw was that the Sable Compression didn't come on very well in 2007. It was very spotty in the way it came on. So we really think now that we will probably have about the same kind of year in '08 we had in '07. Then we will likely start to see declines after that. Instead of having it come on late in '06 and really be very strong for '07, it really will split between two years for that strong period.

So it is just, if I'm understanding it -- so essentially, the '07 results weren't really that impacted by the Sable Compression and that's going to be the drag in '08, moving against what you will see in Brunswick?

Yes, it was a lesser effect in '07 than we expected because of the way compression actually performed.

Okay. Great. Thanks.

Thank you. (OPERATOR INSTRUCTIONS) The following question is from Linda Ezergailis from TD Newcrest. Please go ahead.

Thanks. Just continuing on on your other segment, there was a note that cost increased partially as a result of increased business development. And I am just wondering if you can elaborate on what your focus is, year-over-year. My understanding was that you are spending quite a bit of effort on the Caribbean last year. Is that effort ramped up, or where else are you focusing business development?

Linda, it is Chris. Really the primary reason why our business development cost went up a bit is because we were building capacity on the greenfield development side. And so we have put a bit more engineering capability, a bit more construction capability there involvement. So it is primarily building that capacity and it is more or less an ongoing thing. And our focus right now is, as we said earlier, in the northeast and also in the Caribbean. So, that, it is what we have done in this period is continue to have some ability around the acquisition side but really strengthen that greenfield side.

I am sorry. When you say build greenfield capacity, do you mean related to your electric wires business, natural gas pipeline?

So it is primarily, it is primarily on the transmission side but it is about having a few more people available in the company to do that kind of work. Primarily electric transmission and electric generation.

Okay. And another line item -- O&M in your other section segment -- how much O&M was capitalized related to the Brunswick pipeline in the quarter as well as interest?

Linda, it is Nancy. There wasn't much O&M capitalized. There was from a -- maybe from a AFDUC there was C$0.5 million. The capital cost -- so any O&M really would be going into the capital cost of the project, which at the end of the year were around C$45 million.

Okay. Interest? And again de minimis?

Yes. There wasn't really much interest. The balance went from probably about $20 million to about $40 million in the year. So interest on that would be in the interest line on the other segment.

Okay. Thank you.

And the answer to your question, the 111.4 million is the answer for the average shares outstanding in the fourth quarter.

Okay. What about on a diluted basis?

We will have to get that. Sorry.

Okay.

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

Most of my questions have been asked, but I wanted to follow up with Linda's initial question. This is for Ralph. Ralph, you said that inclusive of the potential default that still 90% of your solid fuel costs were hedged for 2008 -- is that correct?

I would have said 80%. That's reflected on page, I think it is 41 or so of the MD&A.

Okay. Just, I think this is more for Chris. The strategic alternatives -- what percentage of your balance sheet or perhaps if you prefer it on an income basis will you expect the Caribbean portfolio to eventually, like what's your target, whether it is invested capital or earnings, what's your target for the Caribbean?

What we are targeting right now, Karen is between C$250 and C$400 million the next years. We think that's a realistic target and we would think that would have a disproportionate contribution to earnings.

And are you, so is the interest throughout the Caribbean or are there a particular set of islands that you are looking for? And how do you deal with the hurricane risk?

Well, right now we are specifically focused on the island of St. Lucia and the Eastern Caribbean. And I think two things. Generally speaking, at least in that neighborhood, the hurricane risk is a little bit smaller. There was a hurricane that went through north of St. Lucia this year. Just in general, we think that those kinds of risks are both insurable for one thing and also manageable.

And when you talk about your focus on the northeast, you talk about transmission and electric generation. You have talked I think about C$110 million transmission investments in the next couple of years in the main area. How much do you expect or plan or target or budget or whatever way you want to quantify it for the generation investments?

Again, it is probably in the same kind of C$200 million ish kind of numbers. Right now we have good news on the transmission. That's ISO New England has just authorized another C$68 million of the C$110 million we have been talking about. That's progressing nicely but on the generation front a couple of hundred million as well.

When you say generation, are you talking hydro, are you talking gas, do you need a contract? Is it going to be merchant? Is it going be a partnership with others?

Some of it is directly in Nova Scotia Power. Nova Scotia Power has some projects on the go right now. That's part of it but as well, we will look to do the things that (inaudible).

Okay. So I just want to make sure. When you are talking about generation you are also looking in regular rated generation initiatives; is that correct?

Yes, we are.

Okay. Thanks.

Thank you. The following question is from Sam Kanes of Scotia Capital. Please go ahead.

Perhaps extending on Karen's question in terms of generation, getting into the renewable stuff, your win thoughts at the moment or what you can or cannot do? Longer term you have spoken on previous calls about your CO2 strategies or emission efficiency strategies and the capital expenditures required behind that, and just kind of a, what's happening if anything on your title test?

Okay. Ralph, Sam.

Hi, Ralph.

With regard to renewables, today we have about 60 megawatts of wind on the ground in Nova Scotia. By the time -- with contracts we are in the presence of putting in place, by the time we get to 2010, we will add 240 to that. So increase the amount on the ground by 5 times to a total of 300 megawatts. The good thing about this from our perspective from a customer perspective is that it provides price stability because we are long-term price contract that is we believe are competitive with the price of oil. From a broader emissions perspective, we have been making investments over the last few years and expect to continue those into the next year or two. Examples would be a precipitator at our Tuft's Cove plant, low nitrogen oxide burners at our Lingan and Trenton generating stations, [soon to be] Point Tupper. And most recently an announcement of a heat recovery boiler at Tuft's Cove to basically produce electrons with waste heat. We think in putting those pieces together in conjunction with the wind and looking at -- depending upon how federal regulations evolve, we feel we are pretty well situated. It is possible we may find ourselves acquiring credits under say a federal technology fund.

And your Title project, that's still --

Title project, yes, I think it is a very exciting opportunity. The studies that have been done by the Electric Power Research Institute indicate the Bay is perhaps one of the best locations on earth. We think the technology provider we have aligned ourselves, which is OpenHydro out of Ireland, has the best technology we have seen. But there's a lot of work to do, it is an exciting opportunity, a lot of work to do.

Okay. Thank you for all of that. Follow up, just in general, you have laid out your debt management observations where things are at, coupon rate -- how does the next several years of financing look at the moment in terms of strategies, what you may want to do, roll over, renew with respect to capitalization?

It is Nancy. Really, what's in front of us for 2008 is Brunswick Pipe at this point.

Okay.

What we have said with respect to Brunswick Pipe is we are going finance that with debt. To the extent that we have something in addition to that, we will be looking to issue some equity. But at this point I would say it is really, we can manage Brunswick Pipe on our balance sheet.

Okay. Thank you for that.

We do have an issue coming due in Nova Scotia Power in 2008, and we'll be deciding what we do on that. But eventually it will be refinanced with long-term debt.

Okay. Thank you.

Thank you. There are no further questions registered. I would like to the turn the meeting back over to Ms. Nicholson.

Just to answer Linda's question -- Linda, the diluted average number of shares in Q4 was 124.9 million, and I will turn it over to Chris.

Thank you, Nancy. Finally, before we close, I would like to recognize Karen Taylor of BMO, who is leaving the business at the end of this month. Karen, it has been a pleasure working with you. We have appreciated the fair and professional manner in which you have covered us and all of us here at Emera wish you the best of luck in your future endeavors. In closing, thank you for your interest in Emera and wish you all a great weekend. Thank you very much.

Thank you. This concludes today's conference call. Please disconnect your lines. Thank you for your participation.