Emera Inc (EMA) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Emera first 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, Kevin. 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 Blundon, Vice President Finance and Treasurer, Nova Scotia Power, Bob Hanf, President and Chief Operating Officer of Bangor Hydro and Jeff Cavanaugh, Emera Controller. Emera's first quarter earnings release, financial statements and management's discussion and analysis were distributed earlier in the day via news wire. 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 first 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 Hydroelectric where segment results are reported in U.S. dollars. I will take a moment to remind you that this conference call may contain forward-looking 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. Now, I will turn things over to Chris.

Thank you, Jen, and good afternoon, everyone. I'd like to start by saying that I'm pleased with our first quarter results. Strong financial results have started 2008 off on the right foot. Consolidated earnings for Q1 were $69.4 million, a record quarter for Emera, compared to $39.7 million for the first quarter of 2007. Earnings were $0.62 per share compared to $0.36 per share last year. A big part of our success this quarter relates to effective management of fuel costs in Nova Scotia Power at a time when commodity prices are at record highs, NSPI was able to optimize their hydroelectric resources, switch to lower cost natural gas from oil and make strategic power purchases which displaced higher cost fossil fuel. These changes reduced our fuel costs significantly from Q1 2007. I'll leave the rest of the financial details for the quarter to Nancy.

First, I'd like to update you on our greenfield development. Brunswick pipeline construction is underway and we expect the pipeline to be in service during the fourth quarter of this year. We've revised our cost estimates based on our most up to date information. We now expect the project to cost approximately $465 million. Increases are associated with several factors, including delays in accessing required rights of way, which has resulted in modified construction plans. Larger volume of rock than anticipated along our construction route, general industry conditions which have resulted in price inflation, both from a labor and materials perspective, and additional efforts in working with stakeholders and regulatory agencies. We've now secured all the rights of way with the exception of a few kilometers. We're working with the NEB and effected landowners to resolve this access as soon as possible. In the meantime, construction continues as planned. Our contract with our customer Repsol addresses such price escalation.

On the electric side, we signed two memorandums of understanding in the quarter consistent with our goal of developing transmission in the region. We partnered with National Grid in March on the development of the northeast energy link transmission connection. National Grid has significant expertise managing electricity transmission networks. They own 9,000 miles of network in the northeastern United States, and also own significant transmission assets in the UK. We're pleased to have such a quality partner on our project. Together, we're currently evaluating the feasibility of a new electric transmission line from northern Maine and Maritime Canada, to supply energy to the southern New England market. The northeast energy link would provide the New England market with new access to a portfolio of existing and renewable generation development in both northern Maine and Atlantic Canada. This would provide reliable and cost-effective electricity to the growing New England market and assist state governments in achieving their environmental objective. The team will present this project to the ISO New England planning advisory committee tomorrow. The process will be refined throughout the '84, and we will keep you updated as we learn more. Work continues 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 energy transmission and energy marketing opportunity. The opportunity leverages our expertise at Nova Scotia Power, Bangor Hydro and as Emera Energy Services. The project is encouraging and we look forward to decisions that will be made in 2009.

In February, Emera invested $15 million in open hydro, an Irish renewable generation company. Open hydro designs and manufacturers' marine turbine for harvesting energy from tidal currents under the world's oceans. Some of the best tidal sites in the world are in the Bay of Fundy. This is an opportunity to realize the benefits of an outstanding natural resource with a huge potential for clean, renewable energy that is right in our own backyard. As well, Nova Scotia Power is making solid progress on its cleaner, greener strategy. Over 180 megawatts of new wind contracts have been announced and another 60 megawatts will be announced in the next few weeks. This new wind capacity is five times as much as currently exists and will bring total installed capacity to some 300 megawatts in 2010. These GHG free renewable energy projects will generate enough electricity to power 80,000 homes in the province. These contracts are good for us, the Nova Scotian economy, and more importantly, will help stabilize prices for Nova Scotia Power customers while reducing our environmental footprint.

In the Caribbean, we continue to explore new opportunities to build on our investment in (inaudible). We are pleased that the Caribbean development bank is hosting their annual general meeting here in Halifax at the end of May. It will give us a chance to showcase our great city and to spend some time with leaders of many Caribbean countries, hopefully the weather will cooperate. I'd also note a leadership change at Emera energy. Wayne O'Connor has been appointed Chief Operating Officer of Emera Energy Services. He's been with the company five years, most recently as Vice President of Operations for EES. Wayne is a strong leader and has a deep knowledge in electricity and gas markets, derivatives and risk management techniques. Since joining Emera, Wayne has proven himself to be a very valuable member of the Emera Energy team making significant contributions to its profitability and growth. Welcome to the team, Wayne. Finally, I remind you that Emera's 2008 annual general meeting is tomorrow in Halifax at 2:00 p.m. Atlantic. We will be webcasting the meeting for those of you who would like to listen in. Nancy?

Thank you, Chris. And good afternoon, everyone. As Jennifer 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 $69.4 million in the first quarter of 2008, compared to $39.7 million for the same period in 2007. Quarterly earnings per share were $0.62 compared to $0.36 in 2007. Earnings increased quarter-over-quarter mainly due to higher earnings in Nova Scotia Power. NSPI's earnings increased to $57.9 million in Q1 compared to $26.1 million in Q1 2007. As Chris mentioned, effective management of fuel costs played a big role in achieving this earnings result. NSPI also had higher electricity sales volumes and Q1 did not include a rate adjustment. The rate adjustment did not take place until Q2 of 2007. Bangor Hydro reported earnings of $5.5 million in the quarter compared to $6.9 million for the same period in 2007. Most of this decrease relates to foreign exchange due to the stronger Canadian dollar. Earnings were relatively flat in our other segment to $6 million in the first quarter of 2008 compared to $6.7 in Q1 of 2007. Earnings at energy services were due to reduced gas trading activity and a higher Canadian dollar. Maritime to northeast pipeline had lower earnings in comparison to last year due to the capitalization of certain costs in Q1 2007 which had previously been expensed. These decreases were partially offset by higher energy and capacity sales, and increased market to market accounting gains in Bear Swamp. Consolidated net cash provided by operating activities was $26.4 million for the first quarter of 2008, compared to cash used in operating activities of $18.5 million, for the same period in 2007. The increase in the quarter was caused by higher cash earnings in the period. That's all for my financial review. Thank you. And we'll be happy to take your questions.

Thank you. We'll now take questions from the phone lines. (OPERATOR INSTRUCTIONS) Our first question is from Sam Kanes from Scotia Capital. Please go ahead, sir.

Congratulations on a very strong first quarter and great management. Are are you able to keep this -- wrong word, access, I guess, just the ability for the rest of the year, your, let's say additional earnings of Q1 throughout the year? I know you infer, refer, staying within your ROE range at SPI, and of course you mention the fuel suppliers suspending shipments. As that is something that obviously sounds potentially negative that may affect the rest of the year, maybe it already has affected you. Can you give more color to those things?

Sam, Ralph Tedesco. As we look at the rest of the year, our outlook continues to be to earn within our allowed return. As we look at our fuel, despite some of the headaches that we've had with this fuel supplier, right now we're looking at virtually being, virtually solid -- sorry, 100% hedged on solid fuel. So we feel pretty good about our outlook. And, of course, throughout the rest of the year, we'll be continuing to look for opportunities in the market should it present itself to further enhance our financial position.

I can't remember you ever exceeding or being below your ROE range other than being slapped around a few years ago on that issue that was not really fair to your shareholders. Won't dwell on it. But if you were to come in above ROE with this transition towards your FAM next year, I presume, assume you can keep anything above the upper end of your range, is that correct?

As things stand, I'm not sure there's anything that would necessarily prevent us. But of course, as you point out, had there been a FAM in place, then of course we'd be sharing that with our customers. And that really is ultimately the importance of having a FAM. That we can -- the company is simply looking to recover its fuel costs, not make money or lose money with fuel, just recover our fuel costs.

Right. So in the context of this year, you simply have a great head start? Is that the way to summarize it?

Yes, I am very pleased with the job our folks have done.

Thank you. Our next question is from Matthew Akman from Macquarie. Please go ahead, sir.

Thanks very much. I wanted to just talk about some of the new transmission projects that are on line or coming in. The transmission project, I guess there's no uncertainty now about the return on that. Is that right, Nancy? It's delivering the return that you guys had anticipated?

Yes, Matthew, the NRI is delivering the return that we had expected.

Okay, that's good. And on gas pipeline, I'm sure I've asked this question before, with cost overruns, now there's new cost overruns, so how does that affect the achieved return on the capital you're investing, if at all?

Matthew, you probably remember that the contract that we have with Repsol protects us in terms of the capital cost. And so, directionally we've said that we will earn between 11% and 14% on a 40% equity, that's a good way to look at the earnings on that project. And that will still be the case with these cost overruns.

Is it fair to say that you would be towards the lower end of that because of the new cost overruns, or is it not affecting your return at all?

We are protected. The contract protects us on cost overruns, and so the toll increases. There's a formula where the toll increases as a result of the cost overruns for the additional capital cost.

What causes a swing -- let me ask you this way, what causes a swing between the fairly wide range of return on equity? Is it volume flow then, if it's not construction costs, or what would it be?

No, it's just the way the toll is designed. There's an increase in the back end of the contract, so it's really lower in the front end and higher in the back end in terms of that rate of return on equity.

Thanks. Those are my questions.

Thank you. Our next question is from Andrew Kuske from Credit Suisse. Please go ahead, sir.

Thank you. Good afternoon. You've managed to build up a pretty interesting set of potential projects in the northeast, and I'm just curious about your appetite for looking at doing anything with potential partners. You clearly have one partner, Brookfield Asset Management on Bear Swamp as a joint venture, but when you look at some of the pension fund money that's out there and their appetite for some long dated infrastructure assets, do you see that as being a good potential relationship for you in the future?

Well, I think it's certainly one of the options that's before us. It's Chris, Andrew. As we look at projects in front of us we actually feel very good about being able to finance those projects, especially with the partnerships that we're putting together. And so, what we've tended to do at this point, anyway, is to really focus on partners who actually have a stake in the game in the market. So that's why Spectra Energy, we've been working with Spectra Energy, we've been working with National Grid, and we've also begun to work with Newfoundland Labrador Hydro. Those are all companies that are interested in developing these resources and who individually can make a contribution to the project as well. When we he think about the New England project as an example, Bangor is a sending in utility, the right of way work will happen with a company like Spectra Energy and then National Grid is a potential terminating utility which really begins to put together an ability to get some traction on that kind of a project. So at this point, that's the way we're looking at it. As time moves forward, financial fires could also come in as well, but this is where we are right now.

Just on the transmission front, there is a little bit of a divide starting to happen in NEEPOOL, really from the north part of the region versus a lot of the load and demand centers in the southern part of NEEPOOL. And I'm just curious as to what are your thoughts on directionally -- where NEEPOOL will wind up going, will you see a divide from Maine, it will really be bifurcated?

Well, I think, the way we think about this, and Bob Hanf is here today, as well, he may want to chime in, but the way we think about it is that there is a real need for this kind of energy and this kind of connection with Canada and with Maine as as a state, so the opportunity to get a substantial amount of renewables built in those jurisdictions and then have those shipped into the lower parts of New England, I think is a great opportunity, so we don't really sort of think too much about exactly what structure we have to do that. We certainly work well withe structure we have today, if the state of Maine made another decision and there was a different structure, then I think we could work with that as well, because I think we have an economic situation here that actually is compelling by itself. So, that's really the way we think about it. Governments will make decisions, and we'll work with those decisions as they make them.

That's great. Thank you.

Thank you. Our next question is from Michael McGowan from BMO Capital Markets. Please go ahead, sir.

Good afternoon. Just had a question about some of the derivative gains that were included in your revenue. It looks like there was an $11 million hedging gain included in revenues, $11.5 million mark to market gain. Does this relate to your fuel positions, and is there a -- A, are they realizing, B, is there a possibility that they'll reverse in latter periods?

Michael, It's Nancy. The $11.5 million, if you look on page 11 of the MD&A there's an $11.5 million amount which is some gains recognized in earnings. That's largely hedges that we've had on fuel that have flowed through in a positive way to our fuel in Nova Scotia Power. So, that has been recognized and is part of the good solid fuel management that we've had in Nova Scotia Power.

What about the $11.1 million hedging gain?

So that -- the $11.1 million is mark to market -- largely mark to market gains in Bear Swamp Energy Services, so the $4.75 million, approximately, gain on that particular piece of contract that we're separating out on Bear Swamp is in that $11.1 million. There is some operational mark to market gains, and there is some mark to market gains in our energy service business, which is that $11.1 million -- makes up that $11.1 million. There's probably a small piece of it that's related to Nova Scotia Power, very small piece, but for the most part, it's energy services in Bear Swamp.

Okay. Thank you. That's my question.

Thank you, Mike.

Thank you. Our next question is from Robert Kwan from RBC Capital Markets. Please go ahead, sir.

Thank you. When you -- can you just provide an update on the various New England transmission projects that you're working on? Has there been anything new to report since disclosed coming out of Q4?

Well, I think the most significant development, Robert, it's Chris, is really the developing partnerships that we're putting together there. We think it's critical to have the right people involved in these things if they're going to get some traction. I think the other thing I would highlight is that the ISO New England has really begun to think about how they want to work with these various proposals, and I believe that they've created a process now, and I think as I said in my remarks, our team, or the team's National Grid and ourselves are presenting tomorrow to the ISO pack leading the planning advisory committee and part of that process will pick three projects that we'll get an economic analysis done by the ISO, and we'll sort of lead towards some decision making. So, we're quite encouraged about the fact that the ISO is very focused on getting these decisions made, and we feel good about our project's chances in that situation. It's still early days for sure.

Okay. So sounds like the projects are progressing in terms of the conceptual side of things, but nothing kind of concrete moving towards approvals yet?

It's just a little bit early for New England at this stage, although part of what we're doing is working with New England on the approval process. We're also working with the state on the approach that we'll take and we're also looking at how we would pull together the portfolio of renewables necessary to continue to move this ahead. So all these things are steps along the way.

If I could move back to NSPI, just with the strong Q1 earnings, what items or what types of things are you looking at that would drive the earnings to get back into the ROE range as you get through Q2 through Q4? Is it through the higher coal costs that you've locked in, Ralph? You alluded that you're back to about 100% hedged now. Are there some other items that we could see come back into earnings?

Robert, I think -- no, I think you're right on, that what we'll see is slightly higher fuel costs as we move in through the rest of the year, and as I said earlier, we'll be continuing to look for market opportunities to improve on that. But as we stand right now, as I said earlier, the outlook continues to be to earn our allowed return.

Ralph, I don't know if I just misinterpreted it, but you alluded to the fact that there's a possibility that if you earn over the top end of the range that you might expect to be able to keep the earnings. Can you elaborate on that, or -- ?

Yes, in fact, let me clarify that because it's an important point. Under the terms of a settlement that we have, we said that should we find ourselves in an over earning situation we'd actually use that money to pay down an amortization that we have. And that was by agreement with stakeholders. But that is not -- our goal continues to be to optimize certainly our fuel portfolio and to continue to focus on optimizing our operations. So again, as I look forward, I feel pretty good.

So when you're talking about paying down the amortization the effect is that earnings would come back into the range, but essentially, you just clear the decks --

In effect, that's what we're doing.

Okay, great. Thanks, Ralph.

Thank you. Our next question is from [Raymond Bernie] from National Bank Financial.

Good afternoon. I have a couple quick questions here. As far as a run rate for EBIT for Bear Swamp, are we looking at the $3 million to $4 million range going forward per quarter?

That's probably -- it's Nancy -- that's probably, absent any mark to market gains, that's probably a good place to have them per quarter.

Okay.

Kind of in the -- yes, $3 million to $4 million is probably good run rate.

Alright. And as far as -- I guess Robert was talking about transmission opportunities. Are we still looking at the $110 million U.S. figure for Maine?

Raymond, this is Bob Hanf speaking. Yes, we are.

Alright, thank you.

(OPERATOR INSTRUCTIONS) Next question is from Juan Plessis from Canaccord. Please go ahead, sir.

Thank you very much. Congratulations on a great first quarter.

Thank you.

I have just one question with regard to NSPI. Where you expect to earn within your allowed range. What equity thickness are you assuming for this?

We've been allowed equity thickness of up to 40% and that's -- it can be as low as the midpoint of the equity range I think is 37.5%, so somewhere in that range is what we're talking about.

Okay, thank you.

Our next question is from Matthew Akman from Macquarie. Please go ahead sir.

-- title power, I guess this is for Chris because it's kind of a strategic investment, I suppose. Is this the kind of investment that you guys want to be making over time in sort of the manufacturing end of the renewable power spectrum, or would it be more directly an infrastructure that's installed?

Yes, I think, Matthew, that's a very good question When we look at that particular investment, we just see so much opportunity right here in Nova Scotia around that particular technology. And we'd like to be influential in how much of that can create spin-off benefits around this business. So, when we looked at the fact that we'd chosen the technology, the fact that we like it's ability to turn into more, and the fact that it would be great if we could do more of that kind of work in and around the Nova Scotia marketplace, we just thought that that particular investment would give us an opportunity to influence that, and as well, we think if we can be part of making it take off as a technology, then that's a benefit to the company as well. So it's really quite specific. I wouldn't say that we're going to go out investing in technologies all over the place, but this one is so close to home that we think it it the's an important thing for us to be involved in.

So, is it fair to say you made this investment more so you could make future investments in the infrastructure itself for Nova Scotia Power or Emera Energy as opposed to make money on an investment in a kind of power technology company?

Yes, I think we're not focused on making money in the power technology side. We think that might be a happy spin-off, and if the technology works out well, that would be great, but our real focus is in trying to prove the technology, make sure that stream-based tidal is something that really can be mined, if that's a possibility and this could be done in lots of other places. The maritimes in northern New England are all great places, the state of Maine would love to do more in this, the province of New Brunswick would love to do more in this area. It's just such a great fit for us in where we are that we wanted to have a little bit stronger voice in this one.

Do you think that if it were to be proven as economic, it would be done within regulated rate base in NSPI or through Emera Energy?

Well, this particular investment is a pilot investment. There are a lot of contributors to it, everyone from sustainable development Canada to actually some of the local universities, in fact, have put some sweat equity, basically a contribution in kind into this particular situation. So I think that this particular pilot is very much one that's being contributed to by lot of different people. But as we look at investing in various parts of this region, then it could either be an investment by Nova Scotia Power or it could be an investment that Emera would make outside Nova Scotia Power. And I think it's an opportunity to continue to build on Nova Scotia Power's renewable portfolio and ultimately on Emera's renewable portfolio. The answer is really both.

Okay, thanks Chris.

Thank you. Our next question is from Andrew Kuske from Credit Suisse.

Thanks. Just a question as it relates to St.. Lucia Electricity. It's been, I guess, a little bit more than a year since you took your position in that company. If you could just talk a little about what you've learned in that year, your general degree of happiness with the investment. Is that going to be a beachhead, literally, I guess, for further investment in the Caribbean?

Andrew, it's Chris. Well, I think we've learned a lot, certainly about the market in this time. We've also learned, I think that there's a fair opportunity, especially on the generation side, in that marketplace. And so one of the things we're doing today is we're working very closely as a strategic partner of St. Lucia Electric Services to help them with their next round generation decisions. There are opportunities in that market on the geothermal front, there are opportunities for looking at potential gas, there are also opportunities for looking at the potential for some solid fuels, as well. So, things like even biomass. There are lots of things that we're able to work with them to get a much better sense of the kind of opportunities there are in the whole region. So, I think fundamentally, that's what we've learned, and there is work going on that should lead to more investment in that particular company over this next little while.

And could you define that, "the next little while"? Do you mean the next two quarters or within the next 12 months or so?

Well, so all -- these things are greenfield type activities, so they're much longer horizon than that. When we think about St. Lucia Electric Services, it has its generation portfolio in pretty good shape until about 2010, 2011. It needs to make some decisions at the 2011 kind of time frame -- or, for the 2011 time frame, so that means decisions pretty soon, probably in this year, and then investment that would actually come to fruition for the company in the 2011 time frame. So, unfortunately, the work that we're doing is all long lead time stuff. It has a lot of potential, but it will take some time to materialize.

Great, thank you.

Thank you.

Thank you. There are no more questions registered at this time. I will now turn the meeting back over to Mr. Huskilson. Please go ahead, sir.

Okay, well thank you very much for your participation today and your interest in Emera. I just would remind you that our annual meeting will be webcast tomorrow at 2:00 p.m. Atlantic. I hope you all have a great evening. Thank you very much.

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.