Emera Inc (EMA) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Emera second 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, Ms. Nicholson.

Thank you, Mary. Good afternoon, everyone, and thank you for joining us on our second quarter conference call this afternoon. Joining me from Emera are Chris Huskilson, President and Chief Executive Officer; Nancy Tower, Chief Financial Officer; Rob Bennett, President and CEO of Nova Scotia Power; Greg Blunden, Vice President, finance, and treasurer of Nova Scotia Power ;Bob Hanf, Chief Operating Officer of Bangor Hydro; and Jeff Kavanaugh, Emera controller. Emera's second quarter 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 the corporate update. Nancy will then review the second quarter financial results in more detail. We expect the presentation segment to last about ten minute, 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 US 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. Before I begin my update, I'd like to welcome Rob Bennett back to our call today. Of course you're all familiar with him from his former as President of Bangor Hydro, and we're pleased to have him here as our new President of Nova Scotia Power. Rob has been with Emera for his entire career and his depth of knowledge about Nova Scotia Power is a great asset as he leads NSPI in these exciting times. Since coming back to Nova Scotia he has accelerated NSPI's renewable strategy and will continue to further this agenda in the days ahead. Welcome, Rob.

Now, I'll give you a brief overview of our financial results before updating you on other progress this quarter I'm pleased with our financial results for the quarter and for first half of the year. This start will help us manage the fuel challenges of the second half of the year, as we expect to maintain our strong 2007 performance.. Consolidated earnings for Q2 were CAD42.9 million in the second quarter of 2008, compared to CAD34.1 million in Q2 of 2007. Earnings were CAD0.39 per share, compared to CAD0.30 per share last year. Nancy will provide you with further detail on the financials in her remarks.

As for our projects, Brunswick Pipeline construction is in full swing, with about 750 people currently working on the project. We are on schedule and expect the pipeline to be in service in November. We see no further changes to our cost estimates and we continue to expect the project to cost approximately $465 million. The directional drill under the St. John River is two-thirds complete and we are targeting the pipe to be pulled through by mid-September. We expect the final regulatory decision on the last few kilometers of right-of-way soon, and we're well positioned over all with our regulatory approval.

We continue to work on several electric transmission projects in Maine, and with National Grid to move our northeast energy link project ahead. We're going through a rigorous process to get it in front of state governments and regulators and other New England participants. An important element of success is identifying firm supplies of clean energy to use this new transmission project. The work positions us for funding decisions in 2009. In addition, further studies are being done to determine to share economic benefits, potential routing alternatives, and the best method of deploying the BC technology to be use. Work also continues with Newfoundland and Labrador Hydro to determine the feasibility of bringing energy from the Lower Churchill project to Nova Scotia and New England.

These are exciting times in the northeast for energy development. As you know, at the end of May, Nova Scotia Power applied to the Utility and Review Board for a rate increase of 11.9%, which would take effect on January 1, 2009. Electric rates have not changed since April of 2007, and will remain frozen through the end of 2008. A request for 2009 is driven by increases in world fuel prices. Since electricity rates were last set in Nova Scotia early in 2007, the world price can coal has doubled. Last year it was CAD60 a ton and today it's more than CAD130 a ton. As well, oil has more than doubled. Our fuel purchasing strategy, which is closely monitored by our regulators and key stakeholders, has helped us avoid higher rates for Nova Scotians through the 21 month ending December 31st this year. We expect final approval of the fuel adjustment mechanism in NSPI,in December, effective January 1,, 2009. This will improve the predictability of NSPI's earnings by insuring the Company can fully recover actual fuel costs from customers; no more, but no less.

Nova Scotia Power entered into the remaining 60 megawatts of new wind contracts in the second quarter, bringing the award to just over 240 megawatts, totaling 300 megawatts since 2002. This additional clean generating resource will be in service by 2010. NSPI has also announced that it will relocate its corporate offices to a highly energy-efficient building to be developed within the former Water Street generating station in downtown Halifax. The development and operation of the new energy-efficient office space is the low-cost option for the Company and for its customers. The building will be a showcase for energy efficiency and have the lowest possible environmental footprint.

With that, I'll turn things over to Nancy, who will give you more detailed updates on our financial results. Nancy?

Thank you, Chris and good afternoon, everyone. As Jennifer mentioned, our second quarter results were released earlier today -- and actually not that much earlier today and we apologize for that -- but they are now on the Emera website and I'll take a few minutes to review them. Emera's consolidated net earnings were CAD42.9 million in the second quarter of 2008 compared to CAD34.1 million for the same period in 2007. Quarterly earns per share were CAD0.39 compared to CAD30 in 2007. Earnings increased quarter over quarter due mainly to higher earnings in Nova Scotia Power. NSPI's earnings increased to CAD31 million in Q2, compared to CAD23.9 million in Q2 of 2007.

Although commodity prices were higher in the quarter as expected, the increase was offset by an increased valuation of a long-term receivable from a natural gas supplier. This contract requires NSPI to use a combination of historic and future natural gas prices in its valuation. NSPI uses market-based forward indices when determining future prices. Of course, future prices will change from period to period, which will cause a corresponding change in the value of this long-term receivable. The high forward prices at the end of Q2 caused a spike in the value. Excluding the effect of this receivable, NSPI's earnings would have been CAD21.5 million in the quarter. Income taxes were also lower in Q2, primarily due to two things. First of all, there was a lower corporate tax rate in the quarter, and we have also reviewed our tax treatment for certain items and have determined that it's appropriate to expense rather than capitalize certain items, resulting in lower income tax expense.

Looking out, higher fuel costs in quarters three and four will moderate NSPI's earnings for the remainder of the year. NSPI's outlook is to earn at the top end of its range. Bangor Hydro reported earnings of $4.5 million in the quarter, compared to $4.8 million for the same period in 2007. This small decrease relates to foreign exchange due to the stronger Canadian dollar. Earnings increased slightly in our other segment to CAD7.4 million in the second quarter of 2008, compared to CAD5.4 million in Q2, 2007. This increase was due to higher energy and capacity sales, and mark-to-market accounting gains at Bear Swamp. Excluding the effect of these mark-to-market accounting gains, earnings per share would have been CAD0.35 for the quarter. Consolidated net cash provided by operating activities increased to CAD168.3 million for the second quarter of 2008 compared to cash provided by operating activities of CAD82.6 million for the same period in 2007. The increase in the quarter was caused by increased posted margin received from counter parties and higher cash earnings in the period.

That's all for my financial overview. Thank you and we'll now be happy to take your questions.

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

Thank you. I just wanted more color on the Brunswick Pipeline CAD65 million cost increase. How do you plan on financing that?

Linda, it's Chris. Well, we haven't seen a cost increase in this quarter, but as far as the financing of the pipeline as a whole, it'll be financed with -- primarily with debt.

Okay. So the additional CAD65 million will be debt financed as well?

Yes. Linda, we said in the past that we're going to finance that we don't need to issue equity for Brunswick Pipe. And I'll also probably remind you that the contract allows us to recover -- there's a mechanism within the contract to recover the increased costs on Brunswick Pipe, so we would till expect our returns on that project to be in the range that we had previously stated.

So is that added to rate base or is that a return of capital? Do the shipper just pay you back the CAD65 million or do we add it to rate base?

It's really returned through the toll, so it's not -- I guess effectively it's rate based, but because it's not really regulated in that regard there's a mechanism in the bilateral contract that'll allow the tolls to increase as a result of increased costs.

So it's a return on and of capital over the life of the Pipeline?

Exactly.

So I think you can consider it as an increase in rate base. That's the reasonable way to look at it (inaudible).

Okay. And then you mentioned that you don't need to issue equity for Brunswick. What about over all your whole capitalization, given your strong capital project outlook and then this potential cash recovery lag for your fuel costs in NSPI if the fuel adjustment mechanism is implemented next year and your rates are not increased through your general rate application?

Well, so two things. Relative to our fuel costs for next year, that's, in fact, one of the reasons why we filed the rate case so that we would move the base amount of fuel that was in rate forward, so that's very helpful from that perspective. The second -- to the second point, at this point everything we have in front of us that we've now authorized and are moving forward with, we can finance on our current balance sheet.

And you've spoken with the debt rating agencies recently and they're happy?

Yes. In fact we're in good shape right now.

Good. And how was the arbitration process progressing for your fuel dispute at NSPI. Can you give us a sense of timeline, milestones, jurisdictions that you are arbitrating within, et cetera?

It's Rob here -- excuse me. The work continues on that particular front and things are moving along nicely. We'll know a lot more by the end of the year.

So it should be resolved by this year?

Well, resolved is -- is -- I'm uncertain at this point, but we're certainly moving ahead quickly. We've taken a break in the arbitration process to really focus on a settlement arrangement, and over the next several weeks we'll be meeting again and discussing that settlement and then we'll moving forward and know a lot more by the end of the year.

Great. Thank you.

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

Thank you. With respect to inventory or working capital or what happens after the fuel cost mechanism is established, currently your inventory's up CAD31 million year over year. I would imagine it's simply price volumes would be roughly where they should be. Is that correct?

Some of it is price. Some of it is volume, yes.

And some of it is volume. Is that related to the fact that you had a relatively soft quarter in terms of demand for power or just the fuel mix from having really good hydro for the quarter?

It's a mix of both, yes.

Mix of both. Now you're going to be deemed to be carrying a certain chunk inventory going forward in '09, which, of course you have to finance as part of the -- I guess the last question on financing. You would then propose some set estimate of costs and inventory on hand throughout the year, I imagine. Is that how it's going to work and then you deal with the variances on a month-to-month basis going forward with that and passing it through?

Our working capital is one of the items that actually gets determined in the rate case, based on what our forecast's are for the year, so we would have that as part of the overall revenue requirement.

Okay. The second half -- you had 10% lower fuel costs in Q2. Going forward here you've warned now that the second half's going to be a challenge. Are you articulate that a bit more, because you would, in theory know what your contractual prices are now for second half versus first half? Hello?

Sorry, we -- somehow we were interrupted there.

Okay.

The -- in fact the cost of solid fuels in Q2 was higher. There were a mix of items going on there in the fuel numbers in the second quarter and those higher fuel costs will continue through the balance of the second half of the year. In fact we expect our fuel costs will be upwards of CAD40 million, to possibly CAD50 million higher in the second half than they were in the second half of 2007.

Thank you for that. And follow up, with respect to the tax rate in NSPI, it's unusual to see a 33% decrease in tax rate with slight increase in EBIT. Is that sustainable or is this just a lump-sum, one-time adjustment, Nancy, what you're doing with tax treatment of certain expense items?

So, Sam, it's about half and half.

Okay.

There was a rate decrease, of course --

Yes.

-- which played a factor. And there was also this change when we filed our 2007 tax return, we -- we expensed more items -- or items that we previously would have capitalized for tax purposes, so that caused about the other half of the amount.

Okay. Thank you.

You're welcome.

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

Thank you very much. Just looking mow to that fuel charge for next year with your contractual arrangements, now, will we see a lot more -- or less -- sorry, a lot less variability when you run to that charge from the mark-to-markets under the accounting standards or is it always going to be this swingy?

Bob, it's Nancy. In -- we don't get much change from mark-to-market in NSPI's fuel as a result of the -- what we usually term mark-to-market. What's causing the variability in this quarter is this issue with this long-term receivable and the way that we value that and it gets valued on forward prices. We true that up in November -- October/November 2010 and then that will be the end of it. So that's really the on thing causing the variability at this point.

I'm just wondering when we get the fuel adjustment mechanism put into place, will that be the account for the customer then and therefore won't be booked the same way or is that --?

It will -- we expect that it will be booked the same way and flow through the fuel adjustment mechanism as it is now.

Okay. And the RO -- you mentioned that you're expecting NSPI earn at the top end of the range, are you suggesting the 9.8% on 40%?

That's probably close.

Okay. Good results. And can you maybe be a little bit more clear as to what you're -- for tax purposes, what you're expensing now, versus what you capitalized before?

Sorry, Sam -- sorry, Bob. I missed the first part of that.

Oh, just can you maybe clarify what you were capitalizing for tax purposes before that you're now expensing to bring that tax rate down?

It would be things like transformers, for example. That's probably a good example of -- and things like flight overhead.

Okay. And wou -- that'll be picked up in -- I guess starting next year certainly, that'll -- any of those benefits will go through to the customer then, right, because it'll be cost of service item?

Yes. Right. Absolutely.

Okay. One last thing is the IFRS, have you -- how are you addressing the issue of the changes that will be coming?

We've -- we've got a project internally and we've hired external advisors. We've got a steering committee and we're working with our -- internally with our advisors and obviously with our audit committee in terms of making sure we're ready for the change.

There seems to be a group trying to maybe get exemptions for regulatory accounting. Are you part of that?

Yes, the CEA is certainly putting forth a position around regulatory accounting and we are a part of that group.

And do you have any -- is there any feedback so far or still too early?

I think it -- right now my understanding is it's before a committee of the IFRS official body to make that determination, and at this point we don't know the outcome.

And do you know when we might have a decision there?

I'm not certain. We can find out and get back to you, though, Bob.

Okay, thanks. I appreciate that. Good results, thank you.

Thanks.

Thank you. (OPERATOR INSTRUCTIONS) The next question is from Andrew Kuske from Credit Suisse. Please go ahead.

Thank you, good afternoon. Just wondering how you're thinking about returns in the context of your new slate of projects and I ask the question in part because there's a number of companies within the sector that have been emphasizing, unlevered rates of turn -- the internal rates of return over the life of the project. Some of those projects are inherently near-term earnings dilutive, and I'm just wondering, when you think about projects what's your balance between the IRR and things like cash flow accretion in year one or year two and earnings accretion in the near term.

Well, Andrew, I will start, but maybe Nancy might want to chime in. I guess first of all, we're not going to take on projects that are dilutive to our business. At the end of the day, we're looking at projects that are accretive, both from earnings and cash. So far the suite of projects that we've taken on has fallen into that category, and for instance, transmission in New England has been accretive and as well, it's also -- the returns, we've been pretty pleased with that, 12.5%, 13% returns on equity. So, we're not looking to take on things that are going to be dilutive.

Andrew, I'm not sure I could add much, other than certainly when we're looking at projects, in a typical M&A circumstance we would look at both cash returns, risk-adjusted IRRs, of course, and accretions and we would obviously be looking for pretty quick accretion, I would say, in those sorts of projects. I think Chris has talked to -- a lot of our greenfield projects are in regulated businesses where we're earning an AFUDC so they are not dilutive as we're going through the build phase and getting the sorts of returns that Chris talked about.

And just if I may I have a question specific to NSPI. We've seen a number of capacity closures in the forest products complex and some of your larger customers at NSPI are in that sector. Are you seeing the relative competitiveness of some of the local producers within Nova Scotia. Is it improving or is it declining, and then what would that mean for the forward outlook for consumption from those customers?

Overall last year we saw some adjustments in the capacity in Nova Scotia. This year we don't have an indication whether those companies are doing better or worse, those that are still in the business. I think that any impact that you would see for a change in their future, is offset by a change in the amount of fuel consumed in the utility.

Is it fair to say in certain circumstances if you had some of those larger consumers effectively shutter their capacity, it does free up your reserve margin quite a bit.

Yes, I think that's true, Andrew. Obviously we had that situation two years ago when our largest customer went through a labor dispute and I think the Market saw the effect of that on our Company. So, we are in large part not that affected by those kinds of changes. Certainly we do everything we can do to make sure that those customers are as competitive as they can be and that's something that we would continue to focus on.

And then finally, if I may, could you just update your hedge program on fuel?

We're 100% hedged on fuel through to the end of the year and we're hedged for the majority of our fuels going forward in 2009.

Great. Thank you.

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

Good afternoon Just on that CAD9.5 million valuation gain on the long-term receivable, will that included in the UARB's calculation on your ROE?

Yes, it does flow through fuel.

Okay. So I guess if we just take the higher level view of where the earnings are -- you've had a great first half. Now with your fuel outlook do you still think you're going to need to use that extra amortization to manage back into the top end of the range?

We think that the momentum that we've seen from the first half will carry through to near the top end of the range at the end of the year.

So are you now -- we spoke on the last call that you might need to use that amortization to get you back to the top number. Is that something you still see or is the fuel going to help manage he results you had in the first half.

I think, Robert, it's probably less likely that we need it, but we'll see as time moves on.

And then if you do need it, presumably you'll just take it right at then of the year to take the whole slug and put the year back into line?

It would be in the fourth quarter, yes.

Okay. And then just the only other question I had is -- there was in the other segments I think it was CAD1 million for the quarter, just a little over CAD2 million year to date just in terms of higher interest to finance the Brunswick Pipeline, are you not capitalizing interest on the project?

We are booking AFUDC, but on that line you see the pure interest on that investment.

Okay.

So we have -- at Emera Inc. we have interest costs and on Brunswick Pipeline we have AFUDC.

So is this just an in and an out?

Yes.

Okay, great. Thanks, Nancy.

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

Well, thank you all for participating today and for 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.