Emera Inc (EMA) 2009 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 Mary. Good afternoon, everyone, and thank you for joining us on our first 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; Bob Hanf, President and Chief Operating Officer of Bangor-Hydro Electric who is joining us by phone; Robin McAdam, President, Brunswick Pipeline; Greg Blundin, Vice President, Finance and Treasurer, Nova Scotia Power; and Heather Keeler Hirschman, 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 and a high level overview of the financial results for the first quarter of 2009. 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-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. And now I will turn things over to Chris.

Thank you, Jen, and good afternoon, everyone. I'd like to start by saying that we're pleased with our first quarter results. In these challenging economic times, our businesses have continued to perform well, and we've started the year off on the right foot. We're confident in our ability to maintain this momentum and capitalize on the opportunities that we see ahead of us. Consolidated earnings for Q1 were CAD62.8 million,compared to CAD69.4 million for the first quarter of 2008. Earnings were CAD0.56 per share compared to CAD0.62 per share last year. As many of you know, mark-to-market accounting adjustments have a significant impact on our reported results. When we exclude these adjustments, our operating earnings were actually about the same as last year.

Excluding mark-to-market adjustments, earnings were CAD66.3 million for the first quarter compared to CAD66.6 million for Q1 of 2008, and earnings per share were CAD0.59 versus CAD0.60 last year. Remembering that Q1 2008 was an extraordinarily strong quarter, these results are reflective of the year ahead. Nancy will go into more detail about our results later in her remarks. Now I would like to just discuss a few of the actions of our businesses throughout the quarter.

Nova Scotia Power had a good first quarter. The rate increase and Fuel Adjustment Mechanism came into effect January 1, and allowed the Company to focus on service to our customers with a priority on reliability improvement. The FAM will reduce the impact of volatile fuel costs on NSPI's earnings, and will result in smaller swings in earnings between quarters. We feel comfortable that based on current conditions, we will not require an increase in base electricity rates for 2010. We also are optimistic that our current commodity prices will not result in an upward adjustment in rates through the FAM. We know that price stability is important for our customers, and providing this information now will help them make plans for next year.

On the wind front, we've acquired the development rights for the Nuttby Mountain wind project., EarthFirst. These rights include all approvals that have already been secured by EarthFirst, including environmental permits. We will now make a capital application to the Utility and Review Board to develop this 45-megawatt project, which will power about 15,000 homes. We hope to have this wind farm in service by the end of next year. We continue to work with government and other developers to find solutions to enable all of the contracted projects to proceed.

On our newest investment, Emera is very pleased with the relationship that we've developed with the people at Algonquin Power Income Fund over the course of the last few months. We see the relationship and the transaction as a strategic partnership that will leverage our complementary skills. Algonquin's geographic and business line diversification provides an attractive opportunity for Emera to build on our portfolio of renewable energy. We like both the Sierra Pacific and Algonquin assets, and believe that they fit with our current business. We believe Algonquin has the skills to help us as we increase our focus on renewables, and that together, we can capitalize on the robust renewable portfolio standards in California. Our proven utility operating experience and Algonquin's track record of managing and integrating smaller utility assets is a good match, and we expect that we will collaborate on additional utility infrastructure and renewable generation investments. In keeping with our criteria, this investment will be immediately accretive to Emera upon its close.

Brunswick Pipeline completed -- mechanical completion was completed on the pipeline and -- it was a granted leave to open by the NEB at the end of January. The Canaport LNG terminal is close to completion, and gas is expected to flow early in the third quarter. Bangor-Hydro had another strong quarter. They have continued to build on their transmission investments, which will result in earnings growth for the business. FERC transmission rate case is underway, and we expect new rates to be in effect by June 1 of 2009. And transmission development in New England remains a top priority for us and certainly for Bangor-Hydro. We have over [$130 million] of new projects underway, and are actively working toward additional investments.

In the Caribbean, we continue to explore opportunities, and are especially excited about our recent investment in the Bahamas. We're just beginning a wind study on Grand Bahama Island to determine if wind power is viable -- a viable option for the Island. We recently installed wind test towers, and are looking forward to these results. This is an exciting first step in our exploration of displacing, or the possibility of displacing, the region's oil-based generation with some amount of clean fixed-price renewable generation. On the OpenHydro front, OpenHydro has been very busy this first quarter. It secured a major contract to develop another pilot project, the fourth project so far. This one is for a public utility provider in Washington state, and involves the installation of up to three tidal turbines in Puget Sound. Installation is expected to begin in early 2011. The Nova Scotia project is making progress. Last week, OpenHydro awarded the contract for a subsea base for the in-stream turbine that Nova Scotia Power will deploy in the Minas Basin this fall. It will be the first test turbine in the Bay of Fundy.

I'd like to take a moment now to acknowledge that Tom Buchanan is standing for election to Emera's Board of Directors at tomorrow's AGM. Tom is a Director and President and Chief Executive Officer of Provident Energy Trust. His extensive knowledge of the energy industry makes him a tremendous addition to the Emera Board. We are pleased with our results and progress so far this year, and continue to see many opportunities for renewable generation and transmission development in our core utilities market. I'd like the remind you that our Annual General Meeting is at 2 p.m. Atlantic time tomorrow.

Given the nature of most of our businesses, we're taking the heightened concerns of the potential influenza pandemic very seriously. As part of our business continuity planning, we've taken many steps in the last week to ensure the health and safety of our employees and the public. In light of these concerns, we will enhance the webcasting and teleconferencing options for our AGM. These efforts are being put in place to ensure shareholders can participate in the meeting remotely if they choose to do so. With that, I will turn things over to Nancy, who will give you a more detailed update on the finances.

Thank you, Chris, and good afternoon, everyone. As Jen mentioned, our first quarter financial results were released earlier today and are on the Emera website. Emera's consolidated net earnings were CAD62.8 million in the first quarter of 2009 compared to CAD69.4 million for the same period in 2008. Quarterly earnings per share were CAD0.56 compared to CAD0.62 in 2008. Excluding the effect of mark-to-market accounting adjustments, quarterly earnings per share were CAD0.59 in Q 1, compared to CAD0.60 in the first quarter of 2008. The mark-to-market accounting adjustment relates to Bear Swamp's long-term contract with the Long Island Power Authority. The contract resulted in gains in early 2008, and as expected, the gains have reversed in 2009.

Nova Scotia Power earned CAD52.5 million in Q1 2009 compared to CAD57.9 million in Q1 2008. Earnings decreased in the quarter, primarily due to higher fuel costs, which were partially offset by higher revenue and lower tax expense. Any over- or under-recovery of fuel costs will flow through our fuel adjustment mechanism. Bangor-Hydro contributed $6.4 million to consolidated earnings in Q1 2009 compared to $5.5 million in Q1 2008. This increase primarily relates to the weaker Canadian dollar.

Other operations contributed CAD3.9 million to consolidated net earnings compared to CAD6 million in the first quarter of 2008. Net of the mark-to-market adjustment at Bear Swamp, our other segment earned CAD7.4 million in the first quarter compared toCAD3.2 million last year. This increase relates primarily to increased capitalization of financing costs during construction of the Brunswick Pipeline, partially offset by increased interest expense on short-term debt. That's all for my financial overview. Thank you. And we'll be happy to take your questions.

Thank you. And we'll 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. There has been some media coverage on the Nova Scotia political situation recently. I'm just wondering, with the pending provincial elections, if you could give us a sense of what sort of statements the NDP and other parties have made on their views of the electricity industry, and potentially Nova Scotia Power specifically, or any other context in terms of their energy plans that might impact NSPI or Emera.

Well, it's Rob Bennett here. Things have really just kicked off in Nova Scotia in the last day or so concerning the election, so we don't have an absolutely clear picture of what the platforms for the various parties will be. There's certainly an expectation that from the point of view of some parties, there will be an effort to reverse a tax that was levied on electricity bills by the current government last year. So there's likely to be a position taken that that tax should be reversed, which I believe would be helpful for our business. Obviously, there will be other issues brought up through the course of the campaign, but we really can't see that far ahead at this point.

Okay.

And I think, Linda, beyond that, there's strong evidence in Nova Scotia that there continues to be a lot of expectation by Nova Scotians that renewable power continues to become more and more prevalent in the province. We've been working at that for some time, but we expect that that will be part of the discussion as well.

Okay, that's great. And just a follow-up question. Other chatter in the media relating to the Irving Conglomerate expressing an interest in electricity transmission in the regions in which you operate. Would you consider having them in a joint venture, or would you consider them to be a competitor? And maybe you can just elaborate on how the competitive dynamics in the region might evolve if they throw their hat in the arena.

Oh, I think certainly, there's a lot of interest in working between the Maritimes and New England from a corridor perspective, and that's primarily what's being discussed right now. So we think that it's important that many players get involved in that situation. So we think it's great that others are seeing an interest in developing the corridor. As an organization, we've done a lot of work already on that corridor. We've established a pipeline, together with New Brunswick Power in an electricity corridor. We've established an electricity transmission circuit in a pipeline corridor already, and so there has been a significant amount of work in that area. We've also been working recently with the government in the state of Maine on the transportation corridors that exist in that market. And so I think more people being interested in getting energy corridors established and cooperation and collaboration is a good thing. And it's really too early to talk about anything more at that kind of level.

Okay. So you would see them as a potential JV partner, not as a direct competitor, necessarily?

Well, I think in general, when companies are interested in establishing those corridors, then that helps establish the corridors. It makes things move ahead.

Okay, thank you.

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

On Nova Scotia Power we saw with the FAM coming in, and then so many adjustments on the tax side, whether it was related to the FAM or on the pension adjustments. is there -- do you expect there to be a material difference between the GAAP statements this year and the regulatory books?

No, Robert, no we wouldn't expect there to be a material difference at the end of the day between those two sets of books.

Okay. And can you just talk about some of the dynamics that you see with the two big industrial customers reducing production? I know in the past that's been a benefit in winter quarters, just kind of on how that worked on the fuel side. But with the FAM, can you talk about how that dynamic is going to work going forward?

Rob here. Of course with the FAM, it is different in that the -- we're indifferent to the fuel component of change in large customer consumption. So at this point we've seen those large customers were off for a short time at the beginning of the year, but they've been up and running steadily and look to be doing well and running through the balance of the year.

Okay. My just my last question on the Brunswick refinancing, Nancy. Is there -- kind of any update you can give as we're getting closer to the end date on the credit facility?

We're working on it diligently, Robert, and really waiting until gas is in the pipe and the pipe is finished, and completely taking the risk out of the financing. So it is something that we're working on right now, and -- but likely to be completed more in the latter part of the year as opposed to in this quarter.

Okay. And any change -- you talked a little bit around what you saw in the rate side, I think on the last call. Any material change since then?

In terms of the rates for financing?

Yes.

No, I would say what we've tended to see is a little bit more liquidity in the markets, and a bit more activity. So I think we're probably in the same place as we were last quarter in terms of where we think the rates will come in.

Thank you.

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

Yes, just a clarification on that last point, or one of the last points Robert had. In the -- in the, sorry, the usage that you had for industrial, I think I read that your volumes were down and you expected they might be down through the year. But I think I just heard somebody say that maybe they're back and running well.

That's right, they were down in the first -- at the beginning of the first quarter. They had extended over the Christmas holiday shutdown, and then one additional shutdown several weeks later. But they're back up and running now. And the indications that we have at this point are that they'll run through the balance, but, of course, we can't be certain of that. But that's the indication we have.

Okay, because under Outlook it says the Company anticipates reduced production may continue during the remainder of 2009. Is that referring to something else?

No, I think it was really just to be cautious, Bob, that we put that in there because we -- it's difficult to predict and because we've seen them off a little bit in the first of the year. We just wanted to be somewhat cautious.

Okay. And under the FAM, you have an incentive. Can you -- I may have missed this, but can you tell us sort of where you are at that point? If it looks like you're ahead or behind the game?

We're a little bit -- a little bit ahead at this point, and it looks like the FAM will balance out at about what we anticipated for costs by the end of the year.

Oh, okay. So you're not expecting by the end of the year to have any sort of incentive contributing during?

Maybe a small amount.

Okay. Great. And the Nuttby Mountain project, has that been approved to go into regulatory now, into your rate base?

The first small aspect of it, the first CAD1 million dollars of development costs has been approved by the regulator at this point. And we he anticipate putting together the full filing later this year.

Yes, at this point, Bob, we haven't filed a request yet. So it's too early at this stage.

Okay. And I thought that was the case, but in reading it, I could have taken it the other way, too, so I thought I would just double-check. Thank you. And then under Maritimes, the MN&P, the third quarter equity contribution was required to repay down some of the US debt. Why did that reduce earnings out of curiosity?

Well it's -- we've got the -- so if you look at the other section, Bob, you can see that the M&NP equity earnings are actually up a bit. But -- but we've had to, on our interest line and other, we're now carrying that amount that otherwise would have been at Maritimes US. So our interest is up. Our earnings are a little bit up, but our interest is also up.

So that would be a draw, wouldn't it?

Yes.

Okay. And last question, on the refinancing. The lines of credit at Brunswick Pipe are due in June. I think you alluded to this, that you might do the debt later in the year. But if the lines of credit are coming due at the end of June, do you have provisional terms to extend those, or what's the story?

Yes, and I think we -- there's something in the Liquidity section in our [MV&A ]where we've said we've given notice to the banks in terms of the revolving facility. And, of course, we're also talking to them about the -- that bridge facility as well.

But it's not a done deal at this point?

Not at this point.

Okay. But you're very confident, obviously, that you're going to get that on reasonable terms?

Yes, the banks have been supportive of us, and indications are that we'll be in good shape.

Okay. And my last question, Bear Swamp looked fairly disappointing , given in US dollars it looks like it was down about 40%, excluding the mark-to-market. What's the outlook there?

The outlook is -- I would say about the same as 2008 in a -- on a Canadian dollar basis.

Okay. So whatever we saw in 2008 for the year, that's probably what we're going see this year?

That's in the range, Bob. I think that's a pretty good indication of where we'll be this year.

And I think the dynamic, Bob, is that certainly prices in New England are a little weaker right now, so that affects it in one way. On the other hand, capacity charges are continuing to increase, and so there's some positive on that side. So there's a bit of a balancing there.

Okay. And those are my questions. Thank you.

Thank you.

Thank you. The following question is from Michael McGowan from BMO Capital Markets. Please go ahead.

Good morning, or, sorry, good afternoon.

Good afternoon.

Good Afternoon.

Looks like earnings at Nova Scotia Power were fairly strong this quarter. Do you see a similar profile of earnings from NSPI this year compared to last year? Strong during Q1 and Q2, and weaker in the latter half of the year?

The seasonal profile will be slightly different because the fuel impact is now removed because of the FAM. But our revenues will follow weather, and that means that we will have stronger performance in the first and fourth quarter, a little bit lighter in the second and third.

Okay. So really during the winter months.

Yes. Mike, it won't -- last year was quite strong in the first two quarters, and then weakened in the last two quarters. I think the profile this year will be stronger Q1, Q4, and a little bit weaker through the summer, perhaps more typical of years before.

Okay. And the AFUDC you are booking on the Brunswick Pipeline. Is that consistent with the rate of earnings you anticipate booking once that facility is placed into service?

It is generally consistent. At this point, though, we still don't have the full amount of capital in the project at this point. So we're probably in the CAD60 million or CAD70 million light on capital right now just because of timing and also a little bit of cleanup work to be done. So that's the thing that would be affecting it as we speak.

Okay. And you mentioned, I think, earlier that there's a rate increase at Bangor-Hydro that's expected to come into effect at the second half of this year. Do you have the anticipated effect on the -- I guess on the overall contribution from that segment?

I think Bob's on the line.

Mike, I'll be happy to answer that. So on April 1, we did file a modification to our rate formula to have a forward-looking rate. And the impact for 2009 is approximately $700,000.

Positive or negative?

Positive.

Okay, great. Thank you.

Thank you. (Operator Instructions). The following question is from Sara [Sheasa] from Beacon Securities. Please go ahead.

Good afternoon. I was just looking for an update on Nova Scotia Power's wind power purchase agreements. What projects do you expect will be in service for 2010, and do you expect penalties due to delays in some of the wind projects?

I'm not at liberty to say exactly which projects we expect to be in service. But we do expect several to be in service in 2010. Obviously, some are experiencing challenges with financing, and will be somewhat delayed. And we continue to work with those projects.

Okay, thank you very much.

And I think, Sara, the other thing to point out is we think in that general those projects are very helpful to customers. We think they are well-priced and so on. So NSPI is doing as much work as it can both with the projects and also with the government to make sure we can retain those projects for the customer base.

If there are not enough projects in service to meet requirements, is it possible to find another source, such as imports to meet the renewable standards?

We're working with all of levers we have at our disposal to make sure that we achieve our goals. And there's nothing clearly in our sights at this point, but we're continuing to work on that.

Okay, great. Thank you.

Thank you. The following question is from Andrew Kuske from Credit Suisse. Please go ahead.

Thank you. Good afternoon. Just on the Nuttby Wind Farm, do you have any preliminary idea of the cost breakdown, say between turbines, transmission inter-connections and just the other major components? Or is it too early to say at this stage?

It's too early to say. We've picked up the development rights and the land leases and the permits and such, but we're stepping back to re-engineer the project at this point so that we can be sure that we'll be able to deliver a suitable result. We'll know that answer in several months.

And I think, Andrew, a couple things. At this point, we'd be looking at that project being sort of in the range of dollars per kilowatt that you've seen projects hit the market, and we don't have have any better information on that right now. So that work is going on. Two other features that that particular project has is, number one, it has quite a strong wind resource. We were quite comfortable with the wind resource it has. And secondly, it has a good transmission connection, so that's a relatively low-cost feature as well. So when you put those things together, we're optimistic about the cost structure, but we really have to -- Rob and his team have get the engineering done to get there.

Yes. I asked the question in part because we've seen turbine, wind turbines in particular, the cost sort of roll over and start to decline. And in a lot of the construction activity, the costs have come down. So just curious if you could come under that CAD100 million that was sort of approximate amount that you disclosed a few weeks ago.

We're optimistic that that's the direction that we'll see, but until we finish the engineering and actually get the sourcing in place, it's just a little too early. But we're optimistic.

And then if I could ask a little bit more detailed question before I ask a broader one. Just at Bangor, the OM&A increased from CAD6.5 million to CAD8.6 million this quarter. Is that just a timing issue, or is that a structural lift upwards?

I attribute that to pension costs, and we added a number of people to our business. So I think that's the change. And there is a timing issue as well, I think.

Is there any breakdown of pension costs versus people being added?

We have that. I think we can supply that.

Okay. I'll contact you after then, for that. And then just on the acquisition outlook, obviously you've been active in the a number of fronts, whether we look at the agreement with Valcor or the Algonquin announcement just a short period of time ago. When you look sort of broadly across North America, what are real the attributes you are looking for? And how do you think about your unlevered returns on assets?

Well, I mean I guess first of all, it depends on which assets we're talking about. I mean we -- as we sit today, we're still focused on unlevered returns that fit the risk profile of the particular asset that we're focused on. So if it's regulated or contracted, it's a smaller number, and obviously if it's in the Caribbean, as an example, it's a larger number, and so we're -- we continue to gauge those, just depending on the risk profile. The other thing really about where we're going right now, is we're beginning to see some value out there. There are some projects that we're seeing right now that are looking a little better than they have in the past, and so that's a good thing. And we continue to stay focused on ensuring that we get immediate accretion in investments we make, that we get an appropriate risk/reward relationship and that we make sure that everything that we do adds value to the business. I mean that's really the fundamental. At this moment, it's looking better than did it two years ago kind of thing.

And then how do you think about the balance of your business in the future between Canada and the US? If we look at the Canadian dollar starting to move more positively relative to the US dollar, and then just from a valuation standpoint, historically, a lot of the Canadian utility and infrastructure plays have had premium multiples and arguably better capital market access. So how do you look at that in the context of really your business mix out in the future?

There's a real balance there, because returns in Canada tend to be a bit lower. Returns in the US tend to be a bit better. From our perspective, obviously, [there is] foreign exchange risk and so on. So when we -- I mean this is the perfect time, I think, if I just step back for a minute and say I think our strategy to date has created good traction for the business. Over the last four-ish years, we've been able to create about 7% growth annualized, and so that's a good start. The strategy has shown some traction. It's an important time though, for us to now just to step back a little bit. The strategy has been in effect for that four-year period. We are going to take a good hard look at strategy this year, and then we're going to come out of the year with a renewed view of what our next steps look like. And that's really where we are right now, Andrew. And so to some extent it's hard, other than to talk about exactly what we've been doing, it's hard to talk about what the next step looks like. But it will depend a lot on what the opportunity looks like out there, and exactly what the Board and the leadership team sees as the next step for the Company.

So is it fair to say sometime towards the end of this year you'll unveil a three- to five-year strategic plan for the Company as a whole, which would be different than what you had in the past?

Yes, certainly 2009 for us is a strategic review. I can't tell you whether it's different or not. All I can tell you is that we're doing a good solid review. We've put the strategy in place between 2005 and 2006. We've put our heads down and made some progress. We're now lifting our heads up and taking a good look at what's next. And could be more of the same, or it could be something a little bit different, just depending on how things come together for us.

That's great. Thank you very much.

Thank you.

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

Actually just on the earnings that you expected around the Algonquin transactions. Is that net of the financing charges for the equity components for both pieces?

So on the Sierra Pacific, it would be -- we're obviously putting financing in place at the operating Company, and so those earnings would be net of that financing. And the Algonquin would just be our equity earnings in Algonquin, based on 10% and the fact that Chris will be on the Board, we will equity account for that.

Equity account. Okay.

But I think the gross numbers -- what's in the MD&A are the gross numbers. What we've said, when the transaction came together, was it was a couple cents accretive net-net.

Okay. And then just on those transactions, or I guess the Sierra Pacific side which is going drive the Algonquin side, do you have a sense as to when in 2010 you expect the CPUC approval?

Q2 is what we've said.

Okay. Great, thanks, Nancy.

You are welcome.

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

Thank you very much. First of all I would just like to thank everyone for their participation in the call today and your overall interest in Emera. I also want to remind you that our annual meeting will be broadcast both audio and video tomorrow, and I hope you will take the opportunity to listen in and potentially participate in the AGM. It's at 2 p.m. Atlantic time tomorrow. Have a great day.

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