Emera Inc (EMA) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Emera conference call. I would now like to turn the meeting over to Ms. Jennifer Nicholson, Senior Director, Stakeholder Relations. Please go ahead.

Thank you, Jenny. Good afternoon, everyone, and thank you for joining us for 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, Chief Executive Officer of Bangor-Hydro, and Gerry Chasse, President and Chief Operating Officer of Bangor-Hydro. Emera's first quarter earnings release was distributed earlier in the day via Newswire, and our financial statements and management's discussion and analysis are available on our website at www.emera.com. This afternoon, Chris will begin with a corporate update and a high level overview of the financial results for the first quarter of 2010. Nancy will then review the first quarter financial results in more detail. We expect the presentation segment to last about ten to 15 minutes, after which we will be happy to take questions from analysts and investors. Please note that all the amounts are in Canadian dollars with the exception of Bangor-Hydro Electric, whose 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, but are not limited to, 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 very pleased with our first quarter results which reflect the continuing success of our strategy. This quarter, we started to build scale in the Caribbean, with our agreement to purchase 38% of Barbados Light and Power through our investment in Light and Power Holdings, our Barbados public company. We made a strategic link between Bangor-Hydro and New Brunswick with our agreement to purchase Maine and Maritimes Corporation, and we accelerated our transition to cleaner generation with our agreement to build a biomass co-generation facility in Cape Breton.

Consolidated earnings for Q1, 2010 were CAD77.1 million, compared to CAD62.8 million in the first quarter of 2009. Earnings per share were CAD0.68 for Q1, compared to CAD0.56 for 2009. As many of you know, mark-to-market accounting adjustments have a significant impact on our reported results. When we exclude those adjustments, our earnings per share were CAD0.72 for the quarter, compared to CAD0.59 for Q1 of 2009. Nancy will go into more detail about our results later in her remarks.

Nova Scotia Power was the primary driver to our increased earnings, and this is largely due to our significant renewable and other investments in 2009 and 2010. The renewable investments attract tax incentives being offered by the federal government, which facilitate the transition to cleaner energy, and importantly, are helping to delay cost increases for our customers. We invested CAD276 million in NSPI in 2009 and expect to invest more than CAD600 million in 2010. With respect to renewable investments, the Nova Scotia government recently released its renewable electricity plan. The new renewable target will be 25% of total electricity by 2015 and aspiring to 40% by 2020. These goals are in line with what we've been working toward. A minimum of 600 gigawatt hours of additional renewable energy will be required to meet the 2015 target. Half of this requirement has been allocated to Nova Scotia Power and the remaining half to IPP. As a regulated utility with access to capital at relatively low cost, we believe that these provincial regulations will be to the benefit of customers as the generation transition proceeds.

Recently, Nova Scotia Power announced its intention to develop a 60-megawatt biomass cogeneration facility with their largest customer, NewPage Port Hawkesbury in Cape Breton. Biomass plays a critical role in renewable energy strategies around the world, and we believe it will play an important role here in Nova Scotia where we can displace foreign fossil fuels with local renewable energy. This partnership is consistent with our commitment to only pursue projects where we are assured that sustainable harvesting practices will be employed. This energy will be firm supply, easily integrated into the electric system, using biomass as defined in the renewable electricity plan. The project is expected to create an estimated 150 new jobs in Northern Nova Scotia, primarily in the forestry sector, in addition to maintaining NewPage's existing workforce of approximately 550 employees. If approved, the full investment will go into Nova Scotia Power's rate base.

On the wind front, we are seeking approval for the UARB to transfer the Digby Wind Farm to Nova Scotia Power and include that capital cost of the project in the Nova Scotia Power rate base. The project is expected to be built and delivering energy to customers by the end of this year and will contribute toward achieving the Company's 2013 target under the renewable energy standards.

We recently announced our intention to acquire Maine and Maritimes Corporation, a regulated utility in Northern Maine. Keeping with our strategy, this acquisition allows us to grow our service territory in the Northeast. Maine plays an important role in the maritime and New England energy market and we're looking forward to serving the customers of Northern Maine and building on the strong community reputation established by Maine Public Service Company.

Transmission development in New England remains a top priority for us. We have an additional CAD150 million of projects in various stages of development and construction in Maine right now. And in Maine, a new law has been passed regarding energy infrastructure development which is favorable to the development of large scale projects. Specifically, the law creates a statutory corridor designed for energy infrastructure and a process by which approvals to occupy it may be gained. We see the corridor work in Maine as favorable to the development of the Northeast Energy Link and continue to actively pursue this project.

We are also starting to build scale in the Caribbean with our announcement yesterday. We have agreed to acquire 38% of the Barbados Light and Power Company through our investment in Light and Power Holdings, a Barbados public company. We are excited about our investment in this high quality, regulated utility which serves 120,000 customers on the island of Barbados. Barbados Light and Power is generally recognized as one of the best-run utilities in the region. This investment will make us the largest shareholder in the Company, and we look forward to doing business in Barbados and to working with Barbados Light and Power.

00 PM. With the webcast, it will be possible for all of you to listen in if you'd like. With that, I'll turn things over to Nancy, who will give a more detailed update on the financial side.

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 CAD77.1 million in the first quarter of 2010, compared to CAD62.8 million for the same period in 2009. Quarterly earnings per share were CAD0.68, compared to CAD0.56 in 2009. Excluding the effect of mark-to-market accounting adjustments, quarterly earnings were CAD0.72 in Q1, compared to CAD0.59 in Q1 last year. Consistent with prior periods, the mark-to-market accounting adjustments relate to Bear Swamp's long-term contract with the Long Island Power Authority.

Nova Scotia Power earned CAD63.3 million in Q1, 2010, compared to CAD52.5 million in Q1, 2009. Earnings increased in the quarter primarily due to decreased tax expense resulting from preferential tax treatment on our 2010 renewable investments. This spending will occur throughout the year, and it is driving the lower effective tax rate. Bangor-Hydro contributed $5.6 million to consolidated earnings in Q1, 2010, compared to $6.4 million in Q1, 2009. This decrease primarily relates to the stronger Canadian dollar. The pipeline segment contributed CAD9 million to consolidated net earnings, compared to CAD5.4 million in the first quarter of 2009. This increase is due to earnings from Brunswick pipeline as it commenced operations in July, 2009.

Lastly, I wanted to mention our transition to US Generally Accepted Accounting Principles, or US GAAP. Emera's Board of Directors approved our plans to register Emera's securities with the US Securities and Exchange Commission, and transmission to US GAAP instead of transitioning to International Financial Reporting Standards, or IFRS, and we will do that for our fiscal year beginning January 1, 2011. We believe that registering in the US and adopting US GAAP will provide more clear and consistent financial reporting than using IFRS. This is primarily due to the fact that rate regulated accounting standards are permitted under US GAAP, and those US standards are consistent with what we would have been using here in Canada under Canadian GAAP in the past. In addition, being registered in the US will enhance our access to US capital markets. That's all for my financial overview. Thank you, and we'll be happy to take your questions.

Thank you. (Operator Instructions) Our first question is from Bob Hastings from Canaccord. Please go ahead.

Hello. Thank you, and congratulations on a good first quarter. Looking at the NSPI, obviously, they had a nice contribution from -- or savings on the tax side from the CCAs. Given that this will all be regulated, does that actually go to the benefit of the shareholders at this point? Or does it get clawed back later, or how is that going to work through the year?

Bob, it's Rob here. It goes to the benefit of the shareholders, as [part]of any rate setting process.

So this is a permanent benefit that we'll see through each quarter?

That's right. It's also providing the benefit to customers overall because it is offsetting other expenses that might otherwise need to be recovered through a rate adjustment. So it's helping us avoid other increased costs the customers might face.

I think, Bob, the way to think about this is that certainly these renewable investments are important -- an important transition for the Nova Scotia utility. And one way or the other, either the capital would be recovered through some sort of a rate structure, or in this case it's being recovered through the tax savings. So for the short-term, customers will save because the taxes will pay the cost, and then later as time goes forward, the capital will get put into rate.

That's how I would have thought it. So the right way to think of this is, when you say the outlook is you'll achieve your normal -- within the normal regulated rate of return range, it's all in, including this?

Correct.

Okay. Thank you for that clarification. And you're spending quite a bit of money at Nova Scotia Power this year as well. Can you -- and of course, that's a regulatory item. What is the rate that you'll be capitalizing at here? And I know you have a bit of a loud range on both equity and the size of the equity in the rate base, so can you give us the components there?

Well, as we invest, we would be striving to maintain that balance of debt and equity. The rates are set at 37.5% equity, and we usually operate in the range of 37.5% to 40%.

Okay. So I could assume that you will be capitalizing this at 37.5% of -- that's going down to the bottom line, 37.5% times a normal rate of return on equity?

Yes.

Okay. Thank you. And one last question. Is the Caribbean -- I didn't see much talk of that, and we saw some weak numbers in the quarter relative to what we saw last year. Can you give us a little color around that?

I think, Bob, it really is the continuing challenge that we have in Grand Bahama. That Company is in, we would say, a recovery mode, and we're working hard with the management there to get the Company on its feet. And so I think that's the primary thing that you're seeing. Saint Lucia is performing well as always, and it's really focused on Grand Bahama.

This isn't going to turn into a Belize or anything, is it?

No, the issue is this time of year, it's challenged from an overall perspective. As the year goes on, we'll see some stronger results.

Okay. Good. Thank you very much. Appreciate that.

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

Thanks very much. Just a question, first on the quarter. There was a CAD39.4 million negative cash adjustment on the [FAM]. I'm just wondering if you can update us on what's going on with fuel costs, and why the big adjustment in the quarter?

Matthew, it's Rob here. That's correct, the fuel cost this quarter are higher than they were at this point last year. That's driven by a mix of factors, increased commodity prices for the fuel as we're replacing older contracts with newer contracts for fuel. It also reflects a bit of a premium in fuel cost that's being paid in order to comply with the emissions regulations in the province as we strive to comply with mercury regulations and tighter and tighter sulfur dioxide regulations. That drives a bit of higher cost in fuel.

Is there -- does that mean because you're behind on it now that you probably won't be doing as well on the incentive mechanism around the [FAM] this year as you did last year?

It's still early in the year, and we know from past experience that there's a lot can happen on the balance of the year. Particularly with the outlook for natural gas prices that looks like they might be quite low through the summer. That would change our generation mix somewhat and help us bring some of those costs down. But it's really too early to tell.

I think, Matthew, though, we did take a small charge against that incentive. In other words, on the negative side for this quarter.

Thanks for that. Moving on. Can you update us on the timing for your expected timing for Calpeco closing? I think it was initially -- wasn't it second quarter, mid-this year or something?

Yes, Matthew. It's Nancy. We're probably a little later than that now. It will probably be later -- probably mid-Q4 before we see that close.

Toward the end of the year?

Yes.

Is there anything going on there? Or just regular regulatory slowness?

What happened is that the Nevada regulator has decided that they need to do a full IRP before they'll give their approval, and we didn't expect it to be quite that complicated. That's really what's been driving the timing.

Do you see any hitches there, Chris?

No, so far it seems to be going along just fine. It's just that they want to have a good, strong understanding of the interrelationship between the two companies as they separate. Because today, Pierre Pacific uses their Nevada assets to provide generation to the California side. And so that will be turned into a PPA, and so Nevada just wants to have a good understanding of that as they approve it.

Thank you very much. Those are my questions.

Thanks.

Thank you. The following question is from Linda Ezergailis from TD Newcrest. Please go ahead.

Thank you. Perhaps we can just spend a minute looking back to some of your goals for investing in the Caribbean, and you've made substantial progress. So perhaps looking forward, what might we expect in terms of further investments and opportunities beyond your existing businesses?

Well, I think, Linda, we've continued to say we would like to put somewhere around 10% of our balance sheet in that market, and so we're continuing to make progress there. As you know, we're currently working in the Bahamas with BEC as well. So those are -- the opportunities are emerging for us as we would see it right now. I think the only thing that we've been challenged a little bit by is the performance of Grand Bahama, and we knew when we bought into that Company that it needed some work. And so we've been working down that path. But again, we very much like its outlook, and we see a clear path through to where it's going. As it relates to Barbados, Barbados is a very strong organization. We see it as a very strong platform for the southern part of the Caribbean, and we would be looking to make -- potentially make more investments around that Company as well. We've been very pleased with the talent we've seen around the table in Barbados, and we think that they can be very helpful and that we can work together on some further future investments.

That's helpful. And perhaps in light of some of your recent acquisitions, you could give us an update on your permanent financing plans?

Linda, I think our plans still haven't changed. We've said that as we continue to invest we will be in the equity markets at some point with either [prefs] or common. That would still be in our plan be it some time this year or early next year. We're just working through all of that.

Great. Thank you.

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

Thank you. Good afternoon. Nancy, just following up on the last question. The shelfs that you filed, the Emera shelf is only for debt or [prefs]. So is that fair to say that if you look at the market this year, it's really -- for permanent capital is really tapping it for preferred shares more than anything else. I think your language is the first time you have talked about looking out into 2011 for potential equity.

I think I wouldn't say -- I wouldn't take anything from the shelf, but if you're alluding to the fact that we may not issue common, I think we could still issue common. We filed -- I think what we've done with the shelf is give us access -- quicker access to both debt, prefs, and we feel we would have access to common. And in terms of timing, we work through that and depending on when some of these investments that we have close and when cash is needed -- I guess what I've said is in the near-term that could be sometime through this year or early next year. And as I said we would just -- we're just working through all of that.

And then just on the closing issue, because that's really what would drive the balance sheet support from an equity standpoint. So Calpeco, middle of Q4 is now what you're guiding toward, that would roughly line up with Maine and Maritimes?

Yes.

And then sorry, if I could just also -- do you feel avoiding IFRS -- because ultimately in the US, IFRS will be imposed in 2014, hopefully. But do you see this as being a necessity, given some of the issues around the rate regulated accounting in Canada?

Yes, I think for us -- if you think of our investments. Nova Scotia Power being largely rate regulated -- well, being rate regulated, of course. And then Bangor-Hydro already being in US GAAP and some of our other investments already being in US GAAP. So the sizable rate regulated assets in Nova Scotia Power and Bangor under US -- or under IFRS. Without a rate regulated standard, those get written off for external reporting purposes. And there was a fair bit of expense around that in terms of two sets of books, and two utilities, and so on. So we thought the most prudent thing to do was go to US GAAP where there still was a rate regulated standard. And at such time as the US decides to go to IFRS, we will go with them in the measured way that they are planning to do that.

And then do you also see this being potentially the need to be listed in the US? Given the increase in the US asset position? And then also just from a US GAAP standpoint?

I think it's -- again, to Nancy's point, a measured approach. We'll start out by registering our debt and potentially issuing some debt in the US. And then as time moves forward and it makes sense for us, then we would see ourselves listing. But it's not time to do that yet, and so it's one step at a time for us. And I think the biggest thing that we see about rate regulated accounting in Canada today is a lack of certainty. Really just an unknown circumstance as far as where that's going to land, and that was too much uncertainty for us.

Okay. That's very helpful. Thank you.

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

Thank you. Just wondering if you have an outlook for future filings for rate cases at NSPI?

Of course we're always looking ahead at the business, Robert, and thinking about what our needs are in terms of making our returns in the coming year. At this point, we've done quite a bit of work in that area. And our forecasts indicate that generally, without making any commitments here -- but generally we see an opportunity to get through the balance of this year without a case at this time. There is still work to be done, and a lot of uncertainties that can exist in these things, as you know. But right now, I'm optimistic that we can get through the balance of the year without filing.

Sorry. When you talk about not filing, not filing for 2011?

That's correct.

Okay. So basically the higher fuel costs, you've got the benefit of cash tax. You expect that to roll forward into '11?

The fuel adjustment mechanism, of course, is separate from a base rate adjustment. The fuel adjustment process will take place in the fall and have some form of a correction in fuel rates for January 1, 2011. I'm really speaking about an optimistic position that I have right now about base rates. And again, I just want to condition that on situations could change but our economic outlook at this point suggests that we can hold our rates at 2009 levels.

Okay. You've previously disclosed the Bear Swamp operational EBIT. Are you able to do that this quarter, Nancy?

We've made the decision, Robert, that we're going to just report all of that together in Energy Services. They've got Bear Swamp and Bayside both under their portfolio, so it makes sense from our perspective. And so we've really stopped reporting that separately.

Is it maybe fair to say that because it wasn't named as a driver, that it was not substantially different from last year?

Yes, I think that's right, it is -- it's not substantially different than last year.

Okay. Just my last question, in terms of renewables going into NSPI's rate base. I believe we've talked about this in the past, and you felt that the ROE at NSPI was maybe a little bit low for that amount of investment. How do you feel about that going forward? Are you working on trying to get a higher ROE, whether it's for the entire business? Or even just for the renewal component?

Yes, I think, Robert, we've continued to look at that issue, and I think what we're doing right now is looking at how we best manage that situation. As we said earlier, we are going to continue to put equity into the business, and one of the questions we have is what equity thickness will we land at. We have been working with the regulator and the stakeholders on that. And we've also been talking about returns. You have to remember though that we have an agreement -- I think until 2011 -- on our equity return. And so it will be post-2011 before we would be having any more discussions about that. Today, it's mostly related to the amount of equity we can put in.

Okay. So are you happy then with current returns? Or are you putting the money in -- a little bit in good faith that you would expect to see an upward adjustment post-2011?

I think what I'd say is with the level of investment we have right now, we think that the returns are in a reasonable place. What we would continue to say, though, is that we need to keep evaluating that based on the risk of the business and based on how the markets are changing, and as those things come together, then we'll look at that. But for now, we're comfortable with the agreement we struck with stakeholders, and we'll continue to stick to that agreement.

Great. Thank you very much.

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

Hello. Good afternoon.

Good afternoon.

I have a question on your most recent investment in the Caribbean. You talk about it being immediately accretive. Can you discuss the level of accretion there at all?

Yes, we've said, Michael, that it's -- I think it's around three to four -- it should deliver earnings in about CAD3 million to CAD4 million on an annual basis in the first year or so. And we certainly believe that there is, as Chris was saying, that there are opportunities to do some things in, both with the utility and maybe additional investments there to get those returns up.

I think, Michael, it's CAD0.02 to CAD0.03 for this year. I think those are the numbers we're using.

So that would be CAD0.04 to CAD0.06 on a full-year basis?

In that neighborhood, yes.

You've talked in the past about investing close to CAD400 million in the Caribbean. Going forward, do you see -- if you're still looking at those targets -- do you see reaching those hurdles? Are you going to do that through investing in the utilities in which you have already invested? Or potentially taking pieces in other regulated utilities in the region?

I think it's some of each. Certainly the areas that we like in the Caribbean right now are the Eastern Caribbean and Barbados, about that area. So we see the investment in Barbados as a wonderful starting point from an overall investment in that part of the region. We also -- we are happy with our investment in the Bahamas, and we're working right now with the government to see if there's opportunity for us to invest more. We're doing an evaluation right now, and we would expect that to turn into a recommendation as well. So we're focusing on these couple of areas, and at this point, we're still encouraged that the progress is right for the time.

Okay. And just a detailed question on the quarter. It looks like you benefited from lower taxes at NSPI, but in the other segment, you also booked a CAD5 million tax recovery there. And that's almost 100% of your earnings before taxes of CAD5.7 million. Was there anything special driving that recovery?

So, Michael, in the -- where are you exactly?

Sorry. If I'm just taking a look at the corporate costs and the other, you had an income tax recovery of CAD5 million. Just doing the quick math, the earnings before taxes were CAD5.7 million. Just wondering if there was a one-time item, or anything that related to the taxes -- tax recovery there?

That's really just tax recovery on our increased interest costs -- our financing charges. So it is just the accounting tax -- deferred tax amount on that.

Okay. Great. Those were my questions.

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

Well, thank you very much for everyone's participation in the call today, and for your interest in Emera. And I certainly hope that some people will get a chance to tune in tomorrow to our annual meeting where we'll be discussing our year and go-forward. So thank you all for being on the phone today.

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