Emera Inc (EMA) 2009 Q3 法說會逐字稿

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

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

Thank you, Matt. Good afternoon, everyone and thank you for joining us for our third 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; and Bob Hanf, President and Chief Operating Officer of Bangor-Hydro. Emera's third 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 Web site at www.emera.com.

Today Chris will begin the corporate update and a high level overview of the financial results for the third quarter of 2009, and our year-to-date. Nancy will then review the financial results in more detail. We expect the presentation segment to last about ten 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 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. Good afternoon, everyone. Consolidated earnings for Q3 were CAD34.9 million compared to CAD6.5 million for the third quarter of 2008. Earnings were CAD0.31 per share, compared to CAD0.05 per share for the third quarter of last year. Year-to-date earnings were CAD135.8 million or CAD1.21 per share for the first three quarters of 2009 compared to CAD118.8 million or CAD1.06 per share for the same period last year. Nancy will go into more detail about our results later in her remarks.

We are pleased with our results this past quarter and for the year so far. We have momentum in our business and this is translating into record earnings for us for the first three quarters of this year. Our current strategy has been in place for about five years and has been successful. We have seen earnings grow almost 7% per year during this time, and have increased our dividend CAD0.21 over the past three years, including our CAD0.08 increase in September. We have recently completed a comprehensive strategic review to determine if we can maintain this rate of growth by continuing what we are doing, which is essentially playing to our strengths in the electricity industry. We have decided with our Board that this is the best approach for us because there is significant opportunity to use our expertise in both our current businesses and in new regions where we may choose to invest. We see the possibility of increasing our investment in northeast North America, other the next five years.

The focus of this investment will be in three areas. First of all, we will increase the clean energy component of our generation fleet through the addition of renewables including wind, biomass and tile. We will invest to collect these and other renewables and connect them to the grid through transmission projects. And we will invest in natural gas infrastructure to balance the increase renewables, and transition the region from higher carbon to lower carbon generation. We will continue to seek utility acquisition opportunities, and will continue to advance our work in the Caribbean.

We have set our five year objectives and we are excited about the opportunities we see ahead of us. In light of our strategic progress and our strong results, we are pleased that the Board of Directors increase our dividend CAD0.08 in September. We have also made changes to our dividend reinvestment plan, to enable shareholders to buy Emera shares through the DRIP at a 5% discount. We believe this is an attractive option for shareholders, and raising equity through increased participation in our DRIP is part of our long-term financing strategy.

Nova Scotia Power had another good quarter. We're pleased with the predictability of its earnings and its strong growing cash flows. The new rates and the fuel adjustment mechanism came into effect January 1st and allow the Company to focus on service to our customers, with a priority on reliability investments. The FAM increases the certainty with regards to recovery of fuel costs and reduces the impact of volatile world commodity prices. We feel comfortable that based on current conditions, we will not require an increase in base electricity rates for 2010. We know that price stability is important for our customers, and providing this information now will help them make plans for next year.

We are very pleased that the Nova Scotia government has extended the renewable energy standard compliance deadline until the end of 2011. We are continuing to work with all of the independent power producers to help enable their contracted projects to proceed. We continue to make progress on the renewables front. We made a capital application to the Utilities and Review Board in early September to develop a 45-megawatt wind farm project. Decision is expected on December 1st. If approved, we hope to have this wind farm in service by the end of next year.

The open hydro test turbine has been completed and is on its way to the Minas Passage in the Bay of Fundy to be deployed. We have commissioned the turbine in Halifax Harbor and it has met our expectations to this point. We are very keen to see how this turbine performs in this aggressive environment, and continue to believe that this technology shows great promise.

In New Brunswick, Brunswick Pipeline is now in service and began delivering gas in mid July. Cleanup along the route was completed in October. We are very pleased with the performance of the pipeline so far. In fact, the Sable project shut down in August for 20 days of routine maintenance and the new Canaport terminal and Brunswick Pipeline were able to service the entire market region without issue.

Our purchase of Bayside Power from Irving Oil closed on September 1st. We are excited about the opportunities we see with this new asset. This gas-fired plant is a key supplier of energy in New Brunswick during the winter and supplies the US northeast during the summer. The generating station complements our operations in the region, and we believe we can use our operating skills to optimize this facility. We are pleased to have reached this agreement with Irving Oil and believe this will result in additional business between the companies.

Bangor-Hydro had a strong quarter and continues focus on growing the business through transmission investments. We have over $130 million in new projects under construction and are actively working on additional development. We continue to explore opportunities in the Caribbean and to that end have intensified our activity in the region. We are pursuing a number of opportunities actively.

With that, I will turn things over to Nancy who will give a more detailed update on our financial results for the quarter. Nancy?

Thank you, Chris. Good afternoon, everyone. As Jim mentioned our third quarter financial results were released earlier today, and are on the Emera Web site. Emera's consolidated net earnings were CAD34.9 million in the third quarter of 2009, compared to CAD6.5 million for the same period in 2008. Quarterly earnings per share were CAD0.31, compared to CAD0.05 in 2008. Two accounting adjustments had a significant negative impact on earnings in the third quarter of last year, and excluding these accounting adjustments, earnings per share would have been CAD0.22 last year. First mark to market accounting losses in Bear Swamp reduced earnings per share last year by CAD0.07 in that quarter. This is the mark to market accounting adjustment that relates to Bear Swamp's long term contract with the Long Island Power Authority.

In addition, last year, the valuation of a long-term receivable in Nova Scotia Power decreased in the quarter, causing a further CAD0.10 reduction in earnings per share. On a year-to-date basis, earnings per share were CAD1.21 for the first nine months of 2009, compared to CAD1.06 for the same period in 2008. Nova Scotia Power earned CAD16.6 million in Q3 2009 compared to CAD2.3 million in Q3 2008. The change is primarily caused by the valuation of a long-term receivable in Q3 of last year. This contract requires Nova Scotia Power to use a combination of historical and future natural gas prices in the valuation. Changing future prices caused a change in the value of its receivables. Five forward prices at the end of Q2 last year caused the spike in value, and then lower prices in Q3 of last year reversed that.

Bangor-Hydro contributed $8.8 million to consolidated earnings in Q3 2009 compared to $6.5 million in Q3 of 2008. This relates to increased transmission rates that came into effect June 1st, and a stronger US dollar. Other operations contributed CAD9.5 million to consolidated net earnings in the quarter compared to a net loss of CAD2.3 million in the third quarter of 2008. This increase relates primarily to earnings from Brunswick Pipeline. The 2008-quarterly loss was the result of mark to market accounting changes in Bear Swamp.

Both NSPI and Emera have been active in the debt market. NSPI issued CAD200 million of medium term notes in July. We were pleased with the favorable rate off less than 6% we were able to secure for this 30 year note, and the high demand that exists for this issue. Proceeds were used to pay down short term borrowings. Emera issued CAD250 million of medium term notes in October. We were also very pleased with the rate of just over 4% at which these five year notes were issued. This issue was also significantly over subscribed. Proceeds were used to pay down the Brunswick Pipeline bridge facility. We are continuing to monitor market conditions as we consider our options for permanent financing in Brunswick Pipeline.

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

Thank you. (Operator Instructions). Our first question is from Sam Caines from Scotia Capital. You may go ahead.

Curious now that you have had a couple of months under your belt of having the Bayside Power gas plant, how the market is looking on a go forward basis, vis-a-vis the April-October window where last week we spoke you were 100% commodity exposed, or you had no contracts in that period. Have things progressed there? Do you have any preliminary thoughts about utilization of that asset and/or any opportunity of capacity payments for that asset?

Yes, Sam, it is Chris. Thank you for the question. We have in fact been working on contracts in the facility, and at this point we do have a contract for at least minimum load for this facility for that period. That will be the behavior you will see from us with that business. We will continue to work, find ways to contract it, for this point. We have it for the next year, and we will look to continue to do that.

That minimum load is just the minimum amount to keep it fired up, if you may? Is that how that works?

The minimum operating level for the unit is in the low 100 megawatt range so it would be contracted at about that and we will look to see what we will do with the rest of the asset. But to your point, we are working to contract that facility on an ongoing basis.

Thank you. As a follow up, within Bangor, there was CAD1.4 million pickup of purchase power for resale. Is that a business like you have within Emera, or is it back to back physical so that that spread is the absolute margin earned? What are the operating costs against it? Is it a different business?

No, that is a legacy business that exists in Bangor. What happens there is that they're responsible for reselling contracts that they have from the past. But those all flow back through the stranded cost calculations, and so effectively, there's no net gain or loss there. It all gets accumulated and then averaged out in Q3 rate.

So those will decay out and mature out and be gone somewhere down the road.

That's right. In the meantime, as long as the stranded cost activity is there, then that will just balance the whole thing out.

I see. Thank you.

Thank you. Our next question is from Bob Hastings from Canaccord. You may go ahead.

Thank you. I see you filed the Nuttby application a while ago, and I see that you are probably going to be hearing on that, and there's lots of local thought about it, as you would expect. What do you see the obstacles for that, and people are wondering whether the utilities should taking some construction risks on that and operating risks. So what would you be prepared to take is the question in terms of risk if you had to?

It is Rob here. The Nuttby filing is going through the normal regulatory process, and we don't actually expect that there will be a hearing. All of this discussion is happening in a paper format, and things are unfolding as you would normally expect. There are questions to be answered and we are providing those answers in a way that demonstrates that that's a great project and has great value for our customers.

And Bob, what I would add, is that the original contract was in the high 90s, Rob could probably provide the actual number, and the cost of it, under regulation is going be in the mid- 80s. So in fact there's somewhere around CAD10, CAD12, CAD14 difference in the cost of production for the facility inside regulation. So we would argue that that is a good buffer for customers relative to any either production or capital risk that exists around it. And the other thing is we have a substantial amount of that capital already secured through both the contract to have the thing built as well as the hedges that we put on on the euro. So it is pretty well contracted up and the majority of the risk would be on how much the wind blows over time. And again, we've done a lot of work there to understand as much as we can of both the probabilities, and the CAD12, CAD13 reduction in price is a pretty good hedge.

Okay. Thank you for that comprehensive answer. Appreciate that. One related question is with the changes in the Maritimes markets with Hydro Co back and running the power, do you see that changing any of your strategic outlook, and how you are going to look at new generation or transmission?

At this point, Bob, we don't. We certainly are active in that market, we are active in all of the markets around the area. On the one hand, we continue to see opportunity to develop, as we have been discussing. For instance, we have contracts in place both between the utilities and also between Bayside and other assets. The other thing is that if more activity starts to happen in New Brunswick that would be great for the work we are doing in Maine and in New England on transmission. So we see that as being either business as usual or maybe a little bit better.

Thank you very much.

Thank you. Our next question is from Michael McGowan from BMO Capital Markets. You have may go ahead.

Hello. Good afternoon. I had a question about the Nuttby wind facility. Will that facility be eligible to meet your renewable portfolio standards?

Mike, it's Rob here. Yes, it will, for standards in the 2013 time frame. The regulations early on require that the renewable energy projects that are brought on are owned by independent power producers, but post 2011, projects need to be brought on as well to comply with the 2013 target and the utility can certainly own those fully. In the interim, we've made a request in our filing of Nuttby to have an allowance to sell 51% of that project in the event it's necessary, to allow it to comply with the regulations as they are today.

Okay. Because originally that project, the intent was you would buy power from it in order to meet your 2010 obligations.

That's correct.

Okay. And this is a follow up question, probably for Nancy, it looks like there was a CAD5.4 million tax recovery recorded in the other segment. Could you talk about that a little bit and whether it relates to anything specifically.

Mike, I'm just looking it up here on the other segment. But it is our deferred taxes, if you will, or future income tax liability, around the costs in the other section. So we have corporate costs and interest costs, and it is that net of tax on the other things that you see in the other segments. So, Maritime's Northeast partnership earnings, Emera Energy and so on.

Before that recovery you would have had a positive earnings there so that would relate to a couple of the individual segments or the individual businesses that may have lost money?

You are looking in the quarter, the CAD13.2 million?

Yes.

But some of those earnings up above, Brunswick Pipeline, for example, aren't taxable because it follows regulated accounting Some of the equity earnings aren't taxable. It is a bit of a mixed bag. And then, of course, the interest below that line factors into it, as well. So there's a number of moving parts in that tax calculation. But, that is the short answer.

Okay, great,. thanks. I will get back in the queue.

Thank you. Our next question is from Robert Kwan from RBC Capital Markets. You may go ahead.

If I can just follow up on that tax question, is there any way, Nancy, that we can think about it going forward? It does seem to move around, positive, negative, what have you, from quarter to quarter.

I don't know whether there's an easy way. If we look at Bear Swamp it would be taxable at a US rate. Brunswick Pipeline, not taxable right now. Maritimes and Northeast Partnership earnings, taxable in both US and Canada. Emera Energy taxable in both US and Canada. And then GVPC and Lucelec are not taxable equity earnings. And then the corporate and the interest would be taxable. So those are the components and you have to really set different tax rates and so on. So that's probably the easiest way to look at it.

Okay. And just with respect to Brunswick Power, in terms of how you have accrued the revenue when it came to service, is that accrual since that mid July date, and does that represent a pretty good run rate going forward, and will that change after you put the permanent financing in, ie., is it a little low right now just because funding out of the credit lines is at a pretty low rate?

The Brunswick Pipeline is on an EBIT basis. That number is before interest and taxes. The revenue is based on it being in service in July, and against costs that we have actually paid for. So, we should expect to see the Brunswick Pipe revenue climb as we get more of those costs accumulated in the toll. And that will probably happen to the end of this year.

Okay. And conversely EBIT will climb as well as interest expense if you put the permanent financing in, is that fair?

That depends, Robert, because it depends on what we do with the permanent financing, against our short term on the rates at our facility. We've seen fairly favorable rates at the Emera Inc. level the last issue that we did, the rates compare very favorably to our facility. So I am not certain that interest expense will necessarily climb.

At the end of the day it is a straight flow through into rates?

Yes. I think the easiest way to look at it is it's a contracted revenue amount. What we've always said is it's about, if you think of it 60/40, it's about 11% to 14% return on equity on about 40% notional equity. So that's, on a net income basis, the way to look at it.

My last question on Bangor, is the quarter sustainable, or was there any kind of one-time adjustments in the increase in transmission rates booked in the quarter?

I think the one time would be the storm, but that's still from the first quarter and then we had additional expense related with the deferred filing and those are one time.

From a run rate perspective, that's a pretty solid quarter.

And Robert just to quantify your Brunswick question just a little bit, we've got about CAD430 million of capital employed right now. It will be another close to CAD60 million with all of the AFDDC and everything. So that will be how the revenue will ramp up as we get that capital deployed. The revenue is directionally related to the capital deployed.

That's perfect. So there is more to come then.

Yes, there certainly is, and it will just gradually come up as we get that capital in.

Perfect. Thank you.

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

Thank you. Good afternoon. Chris, you mentioned several asset classes you are interested in really furthering your investment base in. Just curious if you prefer one asset class over another. And if you can talk a little bit about return thresholds.

I think the first issue is that we have certainly had a lot of success on the transmission side. So, I don't know if you would say we prefer it over the others but I think you would say we certainly have a lot more momentum on the transmission side than in other areas. Again, I think when you look at that, if it's investment, it can be either local or full transmission. If it's full then it could sit in the 12.5% return on equity. If it is local it could be as low as 11%, 11.5% on equity. If it is in Nova Scotia it will be at whatever Nova Scotia's rate is, the 9.3%-ish number. So those are all based on the different equity ratios, as well. Higher equity thickness in the US and lower equity thickness in Nova Scotia. So certainly I would always start with transmission because it has been a great level of success for us.

Then the next thing is renewables. As you can tell we are just beginning to get going on that front but it is certainly going to be an area of focus for us. The work that we do in Nova Scotia, again, will be primarily against the Nova Scotia capital structure. So it is pretty well known. When you look at New England, we are very hopeful. There has been a bill initiated in the legislature that would see the potential for a Bangor-Hydro or other utilities in the state getting back in that business. So we don't know exactly what the return profile will be for that, but it will be at somewhere around, let's say the average return metrics for Bangor-Hydro. And something in a little bit higher return level than we have seen in Nova Scotia. And when it comes to things like biomass it really depends on how those things come together. And then title is something that is very new and we are just looking at opportunity there.

So, that pretty well talks across that group of investments. And then we go to gas, and certainly on the gas side, we would always be looking for a greater than 10% IRR, for that kind of investment, and even pushing 12% would be a better number. That gives you some sort of a scope.

Then just on the natural gas assets, if you could just give a bit more clarity as to the types of assets you are looking at. In the past, if we go back about six years ago now, six or seven years ago, you were involved in Sable's infrastructure. To which direction are you going go with your natural gas infrastructure? Is it just going to be strictly pipelines or will you stray into processing?

I don't want to mislead you. I am talking about gas as it relates to electricity. So pipeline transmission is certainly in line from our perspective, and gas and electricity. So gas generation. Because we think that gas generation is going to be a part of the transition that we take. The percentage of gas burned in New England is already very high, but the percentage of gas burned in the Maritimes is very low. We also think that gas is going to be critically important, combined cycle gas plants, CTs, will be critically important to balancing intermittent generation that comes on. If you look right now, we have probably got a few hundred megawatts of wind coming on in northern Maine. We have got 400 or so megawatts of wind coming on in New Brunswick, and we have got approaching 300, 400 megawatts in Nova Scotia. And I should say there's another couple of hundred in PEI. So there's beginning to be a material amount of intermittent generation coming to the area. We think that gas plants like Bayside will play a very strategic role in balancing those assets as time goes forward, and being there to back up the intermittent asset.

That's very helpful. Thank you.

Our next question is from Matthew Akman from Macquarie. You may go ahead.

Thank you. First question for Nancy, just trying to get a better sense of the seasonality now for NSPI with the FAM in place. Used to be years going back that the third quarter was significantly weaker than the rest. The first quarter was by far the strongest. We have been all over the place with different fuel costs, and now the FAM, so can you just please update us on that.

Matthew, it may be easier if I give you some sense of where I think the fourth quarter is going overall, rather than speaking specifically to Nova Scotia Power. I think we will see less volatility, and I think next year, from a comparison basis, once we have the FAM in place, it will be a much more stable picture. We've had that funny thing last year in Nova Scotia Power, the valuation of the receivable which caused some fluctuation, and we won't have that. We don't have that any more in the familiar. But just generally speaking, our earnings were CAD1.21 so far this year, and if you look back over the last number of quarters, fourth quarter 2006 to 2008 they were in the CAD0.26 to CAD0.33 range. I would say CAD0.25 to CAD0.35 range is probably a good outlook to use for Q4 this year especially because we have got Brunswick Pipe in addition to our other assets. Maybe that's helpful.

Matthew, it is Rob here. I can expand on that just a little from the Nova Scotia Power perspective. With the FAM, as you know, our performance is going to be driven more by weather. The colder periods, the first quarter and the fourth quarter will likely produce about 65% of our performance, and the warmer periods, the second and third quarter, will be in the range of 30% to 35% of our performance.

Okay. Thanks. That's helpful. And second question is around the ROE debate in Canada. I know in Nova Scotia it doesn't directly impact necessarily unless you go in and practically apply, but I am just wondering how you think about your current ROE range there, vis-a-vis the debate that's going on in Canada and the decision the NEB came out with on the formula return.

Matthew, I think the biggest thing for us is that we have actually agreed to leave the ROE where it is until 2011, I believe -- Rob?

Yes.

So it is a non issue for us for that period of time. After that, as you know, it is going to depend on what the cost of debt is, and the cost of capital. So it is something that we'll be actively attentive to, what's going on in the country, and when 2011 comes along we will get more engaged.

Okay. Those are my questions.

Thank you. (Operator Instructions). We have a follow up question from Michael McGowan gone from BMO Capital Markets.

Just a question about the loss at Emera Energy. Was that caused by Bayside Power or something else?

It is a couple of things, Michael. First of all, we signed up for some US transport on the gas side almost a year ago now, and that was in anticipation of bringing some gas volumes together which, with Bayside, we now have those gas volumes. And so that's been a bit of a burden on the Emera Energy business for the time, but it was a preparatory kind of investment that we made. The second thing is, is that we do have a mark to market going on with Bayside. Nancy, you can maybe speak to that a little better.

There's a gas contract there, Mike, that of course came with Bayside that is going to get mark to market accounting. So there's, I think it's CAD600,000 approximately of mark to market on the negative side and we will see that swing around a little bit. It is only on the basis differential between two points, Drayton and New York, but it's on fairly large volumes so we will see a little bit of swing from quarter to quarter.

Okay. Thank you very much.

Thank you. We have a follow up question from Sam Caines from Scotia Capital, go ahead.

Just on the wind and your proposal to have it within your regulated fold, if you may, was that totally on your own voluntary efforts or were you influenced by the government in any way, shape or form?

No, it was completely on our voluntary efforts because we knew that coming forward there were requirements for renewable energy compliance post 2010, and since the Nuttby project was available at a very attractive price, and was a very attractive project, we moved forward with it.

To you, Nancy. Maritime Northeast has recapitalized itself in some fashion where you were able to net withdraw it looks like CAD27 million of Canadian cash, and I guess you wrote down your equity investment in it. I presume they must have therefore increased their debt equity structure by doing so. Is that the simple math of it?

Exactly. They were on the US side completely equity funded for a while and then reissued. So the partners had put in equity, the US company issued some US debt and then paid the partners back. That's exactly how it was.

Thank you.

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

Actually it is Chris. I will take it from here. I would just like to thank everyone very much for their participation on the call today and your interest in Emera, and I hope you all have a great weekend. Thanks a lot, folks.

Thank you. The conference call is now concluded. Please disconnect your lines at this time. We thank you for your participation.