Emera Inc (EMA) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the Emera conference call. I'd like to turn the meeting over to Ms. Jill MacDonald, Manager Investor Relations. Please go ahead, Ms. MacDonald.

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, EVP and Chief Financial Officer; Rob Bennett, President and CEO of Nova Scotia Power; and Gerry Chasse, President and Chief Operating Officer of Bangor Hydro Electric. Emera's third quarter earnings 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.

This afternoon Chris will begin with a corporate update and a high level overview of the financial results for the third quarter of 2010. Nancy will then review the third quarter financial results in more detail. We expect the presentation segment to last approximately 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 about the known and unknown risks and uncertainties that may cause actual results to be materially different are 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, Jill, and good afternoon, everyone. Consolidated earnings for Q3 of 2010 were CAD44.8 million, compared to CAD37.3 million in third quarter of 2009. Earnings per share were CAD0.39 for Q3 2010, compared to CAD0.33 for 2009. Nancy will go into more detail about our results later in her remarks.

We're 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 the first three quarters of this year. In fact, Emera shares have provided an annualized total return to shareholders of 14.5% over the last five years. This result is one that we are particularly proud of, as it is proof that our strategy is working. Our strategy provides for cleaner energy here in Nova Scotia, stronger transmission interconnection throughout Atlantic Canada and the northeastern US, utilities in the Caribbean, and more natural gas in our region. These are the building blocks for us through 2015. Our strategy has progressed in 2010, and we've put approximately CAD500 million to work so far this year.

In light of our strategic progress and our strong results, we're pleased that the Board of Directors increased our common dividend by 15% in September. Our dividend policy remains to pay out 70% to 75% of earnings, and to grow the common dividend at the same pace as earnings. This year, we've also made changes to our dividend reinvestment plan to enable shareholders to buy Emera shares through the DRIP at 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. Approximately 20% of our shares are now participating in this enhanced DRIP.

With respect to our transmission strategy in New Brunswick, NB Power and Emera continue to work toward formalizing an agreement to develop a new transmission line from Nova Scotia through southern New Brunswick. This is a great first step. But there is much work to be done.

New transmission capacity in Nova Scotia and New Brunswick benefits everyone in the region. It improves our options for future renewable energy developments. It enhances the reliability of the systems and these kinds of transmission improvements will create the potential for a regional approach to dispatching energy resources.

In Newfoundland, we continue to work with Nalcor, to see if the lower Churchill project can get to markets in both the Maritimes and New England. Emera is very pleased to work with our partners in the region towards integration of energy assets. This kind of opportunity creates tremendous value for all involved. We're also proud of the progress we've made on a number of other transactions this quarter.

In mid-October the UARB approved our application for a 60-megawatt biomass cogeneration facility in partnership with New Page Port Hawkesbury. The sale of certain mill assets to enable this project has closed and work is already under way to have the plant in service by 2013. Our partnership with New Page reflects our commitment to pursue only biomass projects where we are assured of sustainable harvesting. At the same time, we're pleased this project will create and sustain jobs in rural Nova Scotia. The CAD200 million investment will go into Nova Scotia Power's rate base and is yet another step in our journey to becoming a cleaner energy Company.

In the state of Maine, we have further advanced our transaction with Maine and Maritimes Corporation. To date, Maine and Maritimes has received approval from its shareholders, and we've received approval from the Maine Public Utilities Commission. This transaction remains subject to a decision by the Federal Energy Regulatory Commission, which we expect later this year. Keeping with our strategy, this acquisition allows us to grow our service territory in the northeast, as Maine plays an important role in the maritime and New England energy markets. We look forward to serving the customers of Northern Maine and building on the strong community reputation established by Maine Public Service Company.

In California, we've made significant progress on our transaction with NV Energy. In October, we received the favorable approval from the California Public Utilities Commission, on our joint acquisition with Algonquin for the California assets of the Sierra Pacific Power Company. We now await the decision from NV's regulators in Nevada. We expect this decision to be finalized by the end of the year.

Lastly, with respect to renewable energy standards, the Nova Scotia government recently enacted regulations under the Electricity Act relating to the Province's renewable electricity plan. These regulations require that 25% of total electricity sales be supplied from renewable resources by 2015. The new target will be measured based on total generation as opposed to post-2001 sources as in the past. The regulations also include a new provision allowing Nova Scotia Power to make up any shortfalls from independent producers that contribute toward RES compliance with energy from other renewable purchases.

We are well on our way to meeting the 2011 and 2013 targets. Contracted wind projects including small scale community wind and small biomass projects will get us to the 2011 target. The New Page biomass partnership and Nova Scotia Power built wind farms will deliver us the 2013 standard. Overall, we are pleased with our results and progress so far this year and continue to see many opportunities in both our new and existing businesses.

We are investing hundreds of millions of dollars in our operating companies to provide cleaner energy to our customers. With that, now I'll turn things over to Nancy who will give you a more detailed update on our financial results this quarter. Nancy?

Thank you, Chris and good afternoon, everyone. As Jill mentioned, our third quarter financial results were released earlier today and are on the Emera website. Emera's consolidated net earnings were CAD44.8 million in the third quarter of 2010, compared to CAD37.3 million for the same period in 2009. Quarterly earnings per share were CAD0.39 compared to CAD0.33 in 2009. Mark-to-market accounting adjustments in Bear Swamp were not a factor in either of these quarters.

In the first nine months of the year, earnings were CAD151.5 million or CAD1.33 per share in 2010, compared to CAD138.2 million or CAD1.23 per share for the first nine months of 2009. Excluding the effect of mark-to-market accounting adjustments in Bear Swamp, net earnings were CAD157.5 million, or CAD1.38 per share for the first three quarters of 2010, compared to CAD140.7 million or CAD1.25 per share for the same period in 2009. Consistent with prior periods, the mark-to-market accounting adjustment relates to Bear Swamp's long-term contract with the Long Island Power Authority.

Nova Scotia Power earned CAD22.4 million in Q3 2010, compared to CAD16.6 million in Q3 2009. This change was primarily due to lower income tax expense as a result of tax deductions associated with NSPI's increased renewable investments. The decrease in taxes was partially offset by lower electric margin and by increased operating maintenance and general expenses, primarily due to higher pension costs and increased storm costs.

Bangor Hydro contributed $11.5 million to consolidated net earnings in Q3 2010 compared to $8.8 million in Q3 2009. This increase was caused by transmission revenue increases and recovery of regionally funded transmission investments. The pipeline segment contributed CAD8.5 million to consolidated net earnings, compared to CAD5.7 million in the third quarter of 2009. This increase is due to higher earnings from Brunswick Pipeline as it commenced operations in July of last year.

At this time, I thought it would be appropriate to look at the capital plans for our two largest subsidiaries for 2011. Nova Scotia Power will spend approximately CAD610 million in capital this year, 2010, and about CAD385 million in 2011. Bangor Hydro has a capital plan of approximately $50 million this year, and that will grow to $86 million in 2011. The 2011 plan for Bangor Hydro does not include anything at this time for Maine and Maritimes Corporation.

Lastly, we continue to be very pleased with our decision to adopt US GAAP in 2011. Activities to transition the Company's financial reporting to US GAAP are on track and we plan to report our Q1 2011 financial results under this framework. The Canadian Accounting Standards Board's recent approval for entities like ours with rate-regulated activities, to continue to report under so-called old Canadian GAAP until 2012 has not impacted our decision.

That's all for my financial review. Thank you, and we'd be happy to take your questions.

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

Thank you. It has to do with a continuation of the accelerated tax shield utilization of renewable assets, and of course that asset base is going to grow here with the biomass project, I presume, first of all that's also at a 50% declining base and it is within NSPI and it will continue with how the tax shielding has worked here this year into future years; correct?

Sam, it's Nancy. Not all of that project will qualify for the accelerated write-off. About CAD130 million of it we think is going to get about a 30% CCH, perhaps 50, but probably around 30. And the rest of it is probably at a more traditional 8% CCH.

So it's a split.

Yes.

The principal's the same, though, because it's within NSPI, it will continue to be deducted against cash taxes payable as you go.

Cash taxes will continue to be the method even under US GAAP for Nova Scotia Power.

The broader question. This gets Nova Scotia to 2013 levels under your new renewable regulatory requirement. I presume since you've committed this far, it would be logical that you would be continuing to look for projects within Nova Scotia to hit that 2015 target on your own within NSPI, or are there other joint ventures or third parties that you would prefer having to pick up the ball from here?

Sam, it's Rob here. The last phase of the current regulations go out to 2015. That's 5% more renewable energy post-2013 levels and the regulations as they stand will allow Nova Scotia Power to invest in about half of that requirement. The other half will be met by independent power producers under contract.

Under contract now or pro forma to be under contract?

Be under contract in that period between 2013 and 2015.

I see. That's been defined. Last broad question, I'll go, Marcellus Shale, hot topic, how will that help or hurt you if at all, I guess with respect to its development with low cost gas?

Well, Sam, it's Chris, we certainly see Marcellus Shale as being a very important energy source to this region, along with the LNG that comes into the region and also the developments in Atlantic Canada. We see all of those as being important developments relative to natural gas. Specifically to Marcellus, our energy services business is beginning to do some business in that region. They're moving some gas now on behalf of producers in that particular field. And we would continue to look to do some of that service work and other things as time goes forward. We would also be hopeful that will give a little better definition as to what natural gas prices will look like over at least the short to medium term and that can be helpful as we're looking at gas assets.

Thank you.

Thank you. Our next question is from Petro Panarites from CIBC. You may go ahead.

Good afternoon. Chris, are you able to give us any idea of time frame surrounding when we might hear about an agreement related to Churchill Falls and also what the total investment potential might be for Emera?

Petro, thank you for that question. Certainly, it's a bit early from our perspective to be quantifying that particular opportunity. As we've said all along, we think that Newfoundland is a very important source of energy to the region as a whole, and so we're very pleased to be working with Nalcor. We've been moving energy on behalf of Nalcor into the New York and New England and maritime markets for some time now and as well, we also as we've said, we continue to work with them under a letter of intent, MOU structure, to try to figure out how we might get that energy, the further energy to market and whether that can be done. So we continue to work along that path, but it's just a bit early for us. So sometime over the next little while, we would be hopeful that would change, but for now, we are at this state.

Fair enough. Just a follow-up. Maybe a bit of flavor on any discussions you might be having with the regulator regarding post-2011 ROE at NSPI? Are you angling for a higher ROE?

We haven't had any discussions with the regulator about ROE post 2011 and we're under agreement right now as part of the original FAM, fuel adjustment mechanism deal to hold the ROE at its current level.

Okay. Thank you.

Thank you.

Thank you. Our next question is from Juan Plessis from Canaccord Genuity. You can go ahead.

Thank you. Looks like you restated Q3 2009. Can you tell us what the restatement was for that and how that might impact the full year earnings of 2009?

Juan, it's Nancy. When we started last year with Brunswick Pipeline in the first couple of months of earnings, we weren't using capital lease accounting and so we changed that in Q4. We have restated, though, the quarter-over-quarter so that it does have the -- it does have the lease accounting so the numbers are now comparable. So what we said, there's about CAD25 million in earnings from Brunswick pipe this year and that wouldn't change that.

Okay. Thank you. And in your outlook, you said you're expecting a lower contribution for the year from Emera Energy. Would that be before adjusting for the mark-to-market changes at Bear Swamp?

Yes, we do all that without mark-to-market changes at Bear Swamp. So we don't try to predict where that mark-to-market is going because it tends to swing a fair bit.

Okay. Thank you very much.

You're welcome.

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

Thanks very much. Nancy, what's the time period over which you'll recover under the FAM application, the CAD75 million, you'll want to recover for the first nine months of the year. Would it all be recovered next year?

Yes, under the FAM agreement, the delayed recovery happens in the subsequent year.

Okay. Thanks for that. Can you remind us of the timeline on the Long Island Power Authority contract with Bear Swamp? I recall it was end of 2011. Is that right? Or does it go longer?

There are two aspects to that contract, Matthew. First of all, there was the capacity provision of that contract and I think the 2010, 2011 time frame is the time frame for that. That means that the unit is actually in the capacity markets in New England and that's essentially where it's been all along. The actual energy contract associated with it actually goes out until -- it was a 15 year deal so it goes out -- I'm not sure exactly what the year is. It's 15 years from the beginning.

Yes.

'22.

'22 or '23, something like that.

Thanks for that clarification. My last question is on Bayside Power. I'm just wondering if this is kind of a normal quarter. There's obviously some very warm weather in the northeast. Does that help the results?

On Bayside, this time of year we're just going -- yes, so it would have been in -- it would have been contracted part of that time to or part of it would have been contracted, sorry Matthew, to NV Power under a shorter term contract and now we're going into a period of the year where it's actually part of it's long-term contracts to New Brunswick Power. So it --

I think Matthew we're actually working to contract that facility, so it was mostly contracted through all of this summer and so that would have taken volatility out of it and if you actually go into next year it's now fully contracted for all of next year. So there's quite a bit of certainty at that point as far as how that business will perform.

Okay. Great. Thanks for those answers. That's all I've got.

Thanks, Matthew.

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

Thank you, good afternoon. A bit of a bigger, broader question. Just curious on your views if you look at the recent M&A deals that have happened in the northeast, the Northeast Utilities, NSTAR deal, UIL buying the assets in the northeast, what does that mean for you from an opportunity standpoint and then also from future transmission plans?

Well, Andrew, it's Chris. I don't think it changes things in a very significant way for us. We've been working in the same path. I think the if you sort of look at our current activities, we continue to see lots of activity in the state of Maine and we're very pleased with the way that's happening.

I think as you know, we've actually continued our project with National Grid, but slowed it down a little bit I would say at this point and we've really been concentrating in the Northern part of the states and also in Atlantic Canada, working towards gathering some energy that would allow us to be able to move forward again with a project further south. So our activities will continue in the same way. We think we still have a very good position relative to that.

We also think that the work that we're doing with Newfoundland is important to that and we're hopeful that we can move in that kind of direction and that energy source will be something that can be part of the equation. We don't know the answer to that yet but we're continuing to work down that path. And all those things come together in that way. I guess it would be hard to ignore the fact that certainly NU NSTAR makes a larger entity existing in that market but we've seen lots of larger entities through our entire history, so we're quite pleased that we can compete.

And then more specifically, in the state of Maine, I know it's early days and the deal hasn't closed off yet but what do you anticipate from a transmission build within the State of Maine under, one, FERC regulation and also just within rate base as we see an increasing amount of wind power and then just a greater connectivity with Canada and Maine.

Well, again, we see the opportunity being one that fits in a couple of different categories. First of all, the state of Maine is very focused on building more wind, a significant capacity of wind has been built through this period and we are working to collect that wind built transmission to the sites and also continue to reinforce the system, and that's been working well for us. We love the inclusion of Maine Public Service, Maine and Maritimes because we think that provides connection to an area with very strong renewable resources and we're hopeful that will turn into more activity and then we also look to the transmission activity we have in the Maritimes as well because we think that's important to strengthen the connections and, therefore, be able to release energy from the Maritimes as well.

So if we think about what's happened in the past relatively short while, there's been about 1,000 megawatts of new wind capacity built in the Maritimes and Northern New England just in the past 18 months and so that's been very good momentum. It's caused the transition systems to be utilized. It's caused us to continue building and our neighbors to build and all those things are turning into good value.

Right now, specifically in front of us, we've got about CAD150 million of new transmission capacity under way, under construction in the state of Maine. We're working hard with NB power to get a new line, a joint development agreement with NB power on a new line in New Brunswick and as I said earlier, we continue to work with Nalcor and are very hopeful about that work.

That's helpful. Thank you.

Thanks.

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

Thank you. Just in Bangor Hydro, wondering if you could give more details about the transmission pool of revenue that was booked in the quarter. You mentioned it was $4 million year-over-year. I don't know if there was an absolute you could give as well.

It's a little bit more detail, Robert than we would normally give, so I'm not sure exactly what you're looking for.

Well, I guess it's just it seems to be a bit of an unusual kind of amount of earnings that you booked versus prior quarters and I think the last time we might have seen something like this was when you put NRI in. I don't know if this is something that's similar or just how can we think about it?

Robert, this is Gerry Chasse from Bangor Hydro. The results for the quarter was really the result of ongoing investments that are going into transmission rates as well as some significant loads that we saw over the course of the period where we hit some very high loads in New England and that transmission revenue was primarily tied to monthly peak loads in the New England system.

So I think, Robert, we have a significant amount of construction on the go and so those projects are coming in and that's contributing and then to the question Matthew asked, the summer peaks were quite high.

Okay. So this is probably more of an unusual quarter at this level?

No, I wouldn't -- I think it's been a strong quarter but we would continue to expect as new projects continue to be put in rate base, Robert, we would expect to have strong transmission revenues there. So I don't think it's that unusual.

Okay. And then just on Port Hawkesbury, as part of that decision, I think the UARB kind of decided or you're going to be bearing a few risks on that project. Can you just talk a bit about that and what your risk mitigation is going to be against that?

Well, in the decision from the UARB, they explained that there would be a process, in fact, it's a normal process for any type of capital cost overrun that would see us go back to the regulator and have a review of those costs. That's not unusual. It's just formalizing that's the way it will happen in this case. And there were some conditions put in around specific risk associated with the financial performance of New Page itself and we have lots of protection in the contracts that we have in place with New Page for the development of the project so we're quite comfortable in moving forward.

Okay. That's great. Thank you.

Thanks, Robert.

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

Hello, good afternoon. I was wondering if you could provide an update just on the recent FAM hearing and if there are any sticking points that came up?

Was that FAM?

FAM, yes.

We went through the annual -- the FAM is really a two-part process. Each FAM segment lasts for two years and every two years the base rates of the FAM are reset and that's really what the most recent hearing has been about. It's the completion of the first full cycle of the FAM agreement. And in the process, we have a discussion about a very small increase in base fuel rates that would be required beginning next year, January 1. And the discussion also included the carryover of fuel costs from this year and the recovery of those costs in the FAM adjustment next year. So those are one-time or essentially at this point seen as one-time fuel expenses of about CAD70 million that will be recovered next year.

So despite the large CAD70 million that you'll need to recover from rate payers, you only are looking for a small increase in base rates going forward?

That's right. The CAD70 million expense that we incurred this year in fuel was primarily driven by a need to meet low mercury regulations in our fuel mix in nova Scotia. Those mercury regulations have been relaxed somewhat under a government decision earlier this summer and that has allowed us to lower our fuel expense going forward, so that high level of fuel cost won't be sustained to the same degree that it otherwise would have been which would have required a much larger and more permanent base rate reset.

Okay. And have another question with respect to Digby Wind. Just given the description in the release, it sounds like the project will be completed at the end of this year but then you have to go to the UR for approval of that project. Did you proceed with this I guess all this capital spending without CapEx approval? Is there any risk of a disallowance going forward?

I think, Michael, first of all, that's particular project was initially purchased by Emera and with a PPA with Nova Scotia Power attached and as we looked at that project, we said really there's better value for customers if we put that project in regulation. So the project is actually complete as it sits with the asset and the PPA. So there's no risk to Emera relative to that. But we've offered it to the Nova Scotia rate payers as part of the overall mix and so we'll go through an approval process in front of the regulator. It will be a little more complex because there is an affiliate transaction involved and that's understandable and then at the end of the process, the regulator and stakeholders will decide what they want to do with that project. They can either put it in regulation and see a slightly lower cost than the PPA was going to provide, or they can leave it outside regulation and Emera will be whole with the PPA. So those are options that are there so we're not uncomfortable with having proceeded with the project. It has a PPA.

We should point out as well that we moved forward with the project with the full knowledge of our regulator. We don't deploy any capital in the regulated utility without their knowledge, pending ultimate approval in rate base.

In the event that they don't approve that decision we would see these earnings show up in Emera Energy?

Yes, that's correct.

Okay. Great. Those are my questions.

Thanks, Michael.

Thank you. (Operator Instructions). Our next question is from Linda Ezergailis from TD Newcrest. You may go ahead.

Thank you. A lot of my questions have already been answered but maybe just drilling down a little bit more to the earnings growth outlook for Bangor. I think you recently struck a new labor deal. Is it reasonable to assume that will kind of -- those costs, those labor costs would kind of move with inflation or is there something else there?

That's correct. The labor deal is in effect until 2015 and calls for a 3% increases in labor rates for the union workforce until that time.

Annually?

Yes.

Okay. And maybe more broadly within Emera, are there any other big labor agreements expiring soon or I can't remember.

Nova Scotia it's the end of a five year -- I believe a five year deal finishes in 2012.

So still some time to renegotiate that.

I think it's July of 2012.

Okay. Great. Thank you.

We have a follow-up question from Michael McGowan from BMO Capital Markets. You may go ahead.

Hi. I was just wondering if you could provide any information on the full year tax rate at NSPI. Looks like you're sitting at a refund the first nine months of this year and whether or not you're expecting to book another refund in Q4.

Yes, Mike, we would expect to continue to book that especially as these wind projects come on. The way we do it is really estimate at the beginning of the year what our capital is going to be and what our tax rate will be for the entire year and so we would -- then we prorate them through the quarter. What you see is probably a good -- you could probably project that over Q4.

So really you won't be paying any cash taxes this year at NSPI?

No, we won't.

Okay. Great. Thank you.

You're welcome.

Thank you. There are no further questions registered. I'd like to turn the meeting back to Ms. MacDonald.

Actually it's Chris, so thank you all for your participation today and thank you very much for your interest in Emera. Have a great weekend.

Thank you. This concludes the conference call. Please disconnect your lines at this time and we thank you for your participation.