Emera Inc (EMA) 2011 Q2 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. Jill MacDonald. Please go ahead, Ms. MacDonald.

Thank you, Dave. Good afternoon, everyone, and thank you for joining us for our second-quarter conference call this afternoon. Joining me from Emera are Chris Huskilson, President and Chief Executive Officer; Judy Steele, Chief Financial Officer; Rob Bennett, President and Chief Executive Officer of Nova Scotia Power, and Gerry Chasse, President and Chief Operating Officer of Bangor Hydro.

Emera's second-quarter earnings release was distributed earlier in the day via News Wire, and the 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 second quarter of 2011. Judy will then review these financial results in more detail. We expect the presentation segment to last about 10 minutes, after which we'll be happy to take questions from analysts and investors. Please note that all amounts are in Canadian dollars, with the exception of Emera's Maine Utility operations, where segment results are reported in US dollars.

I'll 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, Jill and good afternoon, everyone. First I'd like to acknowledge and thank Judy Steele for stepping into the CFO role on an interim basis. I have worked with Judy for many years, and I'm looking forward to continue working closely with her. Many of you know Judy from a previous role as Director of Stakeholder Relations and Investor Relations. Welcome, Judy.

Consolidated net earnings for Q2 of 2011 were CAD29.9 million, compared to CAD48.5 million in the second quarter of 2010. The 2010 comparative amount includes a CAD22.5 million nontaxable gain on an acquisition, and absent this amount, Q2 2010 net earnings were CAD26 million. Earnings per share were CAD0.24 for Q2 of 2011, and after you exclude the acquisition gain, CAD0.23 for Q2 of 2010, a modest improvement year over year.

While the US GAAP conversion, the gain on acquisition, and our equity issue have made results a little more difficult to follow, we're pleased with our results for the first half of 2011, and we're on track to meet our growth targets this year. Consolidated earnings increased to CAD153.5 million for the first half of 2011, from CAD126.3 million for the first 6 months of last year. Judy will go into more detail about our results later in her remarks.

Nova Scotia Power continues to provide strong results, as it works towards our legislated renewable energy targets. In May of 2011, Nova Scotia Power filed a general rate application, its first since 2008. The application requests a revenue increase of 7.3%, averaged across all customer classes, effective January 1, 2012. Smaller increases are forecast for 2013 and 2014.

Nova Scotia Power has publicly proposed a 3-year plan that would hold rate changes stable from 2012 to 2014 inclusive. If discussions with customer interveners produce an agreement for such a plan, Nova Scotia Power will incorporate it into the filing and request approval from the UARB. As requested by Nova Scotia Power in December of 2010, the UARB approved the deferral of CAD14.5 million of tax benefits. Last month the UARB approved an agreement that Nova Scotia Power reached with stakeholders to apply this amount to reduce the FAM fuel deferral costs. This is a continuation of Nova Scotia Power's strategy to keep customer rates as low as possible.

Construction continues on schedule for Nova Scotia Power's 60-megawatt biomass plant in partnership with NewPage Port Hawkesbury. The co-generation facility will produce about 3% of Nova Scotia's total electricity requirement. Our Nova Scotia Power team is also very busy working on the next round of wind projects for 2015. We have been securing land and taking wind measurements at a variety of locations across the province. The objective is to have cost effective wind sites ready for construction during the 2013, 2014 period. So we're equipped to achieve the 2015, 25% renewables target. Nova Scotia Power expects to construct roughly another 100 megawatts of capacity before 2015.

In Newfoundland, work continues to advance the Maritime Link project, that will bring energy from Muskrat Falls to Nova Scotia. In fact, our team is now doing survey work on the Cabot Strait. The engineering has begun, and we expect to file our environmental assessment in the fall of this year. We're also working closely with Nalcor to finalize the definitive agreements which we expect to have completed by year end.

Moving to Maine, we're pleased with how the Maine utilities performed this quarter. Integration of Maine Public Service is going well and we're working to ensure that the business has both the financial and operational performance that meets our expectations. Bangor Hydro and Partner National Grid recently took another step in advancing the Northeast Energy Link Transmission Project by filing with the FERC for approval of its funding approach for the proposed project. It's still early days for the project, but we're pleased with how things are proceeding.

We're also pleased that our Maine utilities and Emera Energy are currently before the MPUC, seeking approval to increase our ownership in Algonquin Power to 25%. In the same regulatory proceeding, we're also asking for approval to purchase, with Algonquin, 49% of Northeast Wind Holdings, which represents our joint venture investment in First Wind. This regulatory hearing continues to be on schedule, with a decision from the MPUC expected in December. In addition to the MPUC approval, we require certain regulatory approvals from other state agencies and the FERC. But we're pleased that the process is moving ahead as planned.

With our projects now stretching from Newfoundland to New England, it was very encouraging to attend the annual New England Governors and Eastern Canadian Premiers Conference held just last month, as there was a clear expression of interest in the lower Churchill project, as well as an invitation for dialogue with government leaders on transmission expansion in New England.

In the Caribbean, things are progressing. 2011 is year 1 of Emera's turnaround plan for Grand Bahama Power, and we recently placed Sarah McDonald as the new CEO to lead this initiative. Emera acquired the controlling interest, knowing that this was a utility that was financially and operationally underperforming. We now expect a turnaround period of up to 3 years to bring the business to Emera standards. As part of this turnaround in the Bahamas, we've recently broken ground for the construction of a 52-megawatt diesel power station that will improve system reliability, while lowering customer rates. With this new generation in place, it's expected that customer outages will be reduced dramatically and allow further improvements to progress.

In Barbados, we have been controlling shareholder for just more than 6 months. Emera's focus now is on integrating the utility with Emera, developing individuals in leadership roles, creating a long-term generation plan that considers their reliance on heavy fuel oil, and the integration of renewable generation. We also continue to focus on regulatory and government strategy to support this work. With our development plans progressing, we expect to generate between CAD18 million and CAD20 million of earnings from the Caribbean utilities this year. With that, I'll the turn things over to Judy, who will give you a more detailed update on our financial results. Judy?

Thank you, Chris, and good afternoon, everyone. It's nice to be here with you all.

Our second-quarter financial results were released earlier today and are on the Emera website. Emera's consolidated net earnings were CAD29.9 million in Q2 2011, compared to CAD48.5 million in the second quarter of 2010. I remind you that the 2010 comparative amount has been restated under US GAAP and as a result, includes a CAD22.5 million nonrecurring accounting gain on our initial investment in Light and Power Holdings in Barbados. Normalizing for this gain, 2010 second-quarter earnings were CAD26 million, so apples-to-apples, we have CAD29.9 million this year compared to CAD26 million last.

Reported earnings per share were CAD0.24 in Q2 2011, and CAD0.43 for the second quarter of 2010, but again, once the accounting gain is removed, the comparative amount is CAD0.23. On an EPS level, the dilutive impact of our share issue earlier this year mitigates the CAD4 million earnings increase, keeping 2011 EPS on par with 2010. I think it's worthwhile for me to take a moment to review the impact of the restatement of our 2010 earnings under US GAAP to help analyze the change year over year.

In February, we reported Canadian GAAP earnings of CAD1.68 for 2010, and in note 22 of the financial statements, provided the detail on what those earnings would be under US GAAP, specifically, CAD1.67 per share. I highlight that the CAD1.67 included the CAD22.5 million accounting gain I've talked about so much already today. We normalized for that and for Bear Swamp mark-to-market, so our 2010 reference point for earnings per share is CAD1.55. You will recall, we had a CAD28 million gain on the second tranche of our Barbados investment, which was recorded in Q1 of this year. When we look at our overall forecast for 2011, again, pulling out the CAD28 million gain recorded this year, and compare it to the CAD1.55 for 2010, we expect to exceed our 4% to 6% EPS growth target year-over-year.

Nova Scotia Power contributed CAD16.7 million to consolidated net earnings in Q2 2011, compared to CAD15.5 million in the second quarter of 2010. The increase was primarily due to increased electric margin as a result of load growth in colder weather, in addition to lower income taxes; both of which offset the impact of higher OM&G costs, which were largely related to labor and pension expense.

Maine utility operations contributed $8.4 million to consolidated net earnings in Q2 2011, compared to $7 million for the same period in 2010. This increase was mainly due to increased returns from new transmission investments, and new earnings from Maine Public Service, which was acquired in December 2010.

Caribbean utility operations contributed CAD3.4 million to consolidated net earnings in Q2 2011, compared to CAD24.5 million in the second quarter of 2010. When normalized for the aforementioned accounting gain, 2010 results were CAD2 million.

Pipelines contributed CAD7.2 million to consolidated net earnings in Q2 2011, compared to CAD4.5 million for the same period, (technical difficulty) due to changes in the mark-to-market of currency hedges year-over-year. Services, renewables and other investments had a loss of CAD1.9 million in Q2 2011, compared to earnings of CAD0.7 million in the second quarter of 2010. The decrease primarily reflects a loss arising from the conversion of debentures to common shares by an investee, Algonquin Power, and higher income taxes. For the 6 months ended June 30, services, renewables and other had a much brighter story, up CAD18 million year over year, including a CAD12.8 million gain on Algonquin investments.

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

Thank you. Questions will now be taken from the telephone lines. (Operator Instructions). The first question is from Linda Ezergailis with TD Securities. Please go ahead.

Thanks. I'm wondering if you could give us just an update on your discussions with various stakeholders on the alternative plan at NSPI? What might the timing be of coming to a resolution? What has been the tone of the discussions and the main sticking points preventing resolution of this quicker?

Well, Linda, it's Rob here. We've been discussing this potential longer-term rate arrangement with stakeholders since the beginning of this year. We've had very good and open dialogue with them. Of course, when you're in the rate setting process, which we're in the middle of right now, things can change a bit and get a bit more formal. At this point, we've continued our discussions, but we're really waiting for the intervener evidence to be filed so that all of the positions of the various stakeholders are on the table and we can then understand how to move the discussions forward. So I anticipate that things will move ahead again in the next several weeks because intervener evidence was just coming in this week.

Okay. So any informal discussions, the tone or the issues that are coming up in those or --?

Generally, people are supportive of the idea of a plan that puts rate increases in place that are more predictable so that our customers and our business can manage around that.

Okay. That's helpful context. And maybe moving on to the second-quarter results, I don't know, maybe Judy or Chris if you could give some sort of a view on how energy and services are looking for the second half of the year, and what some of the moving parts are? Whether or not the dip in services was timing-related and will pick up or might there be some lag still in the second half of this year?

Linda, there's a lot of things that are bundled into that category now. So the first thing I'll point out is the loss that we sustained on the conversion of the Algonquin debentures is in there, so that's kicking CAD1 million out immediately. So that will -- we won't have that to recur in the next quarter or after that. Generally, for the trading business, the shoulder months are the kind of the weaker months, so it doesn't take too much to throw -- to kind of dilute those out. And so beyond that, I would say probably generally we would expect results would be stronger through the balance of the year, because, again, that Algonquin loss took a little bit of a hit in that segment.

Okay. And services?

So that's the whole -- I'm speaking of the kind of consolidated group there. But energy services generally, its big months are in the dead of winter or the hot, hot summer. So Q2 would not necessarily be one of their stronger periods. So Q3 and Q4, I would say generally you can expect them to be stronger. The reality is, you can't exactly predict market volatility. If you could, you could make a lot more money. So their results tend to be slightly dependent on the level of volatility in the market and the money-making opportunities they have there, but the reality is they've had a very, very strong Q1 and kind of reasonably well positioned going into the last half of the year.

Great. Thank you.

Thank you. The next question is from Juan Plessis with Canaccord Genuity. Please go ahead.

Thank you very much, and Judy, welcome back to the quarterly conference calls.

Thank you, Juan. It's so nice to be here.

I'm sure. The Maine Public Service, they reported a slight loss in the quarter. Is this due to seasonality, or is there something else going on there?

I think really they wound up having some, what I'll call transition costs loaded into their OM&G. That would be part of it.

Gerry, is there anything you would like to add?

Judy and Juan, Maine Public Service still has seasonal rates and makes the bulk of their revenue in the winter months due to those seasonal rate adjustments, so that is a typical curve for them that they would experience.

Okay. Great. That's very helpful. And Judy, you may have mentioned this. My phone line cut out for a few seconds there. At Brunswick Pipeline, what was the -- how much was the mark-to-market gain and the currency hedges?

Juan, I'll have to get into my file for that. So give me a minute and I'll report back.

Okay. Maybe I can just follow up with one last question.

Sure.

It's for Chris. Just in regard to your relationship with Algonquin, you initially went into the Calpeco acquisition jointly, and then sold your share to Algonquin. Would this be more the strategy for the current JV initiatives with Algonquin? I guess what I'm getting at if there's the potential for the Northeast Wind investment to be sold back to Algonquin at some point?

Certainly, Juan, that's the kind of approach we've looked at. When we -- if you take a look at the strategic investment agreement that we have with Algonquin it would say that they would focus on unregulated renewables, so certainly we have discussed with them the possibility of increasing their position in that investment for sure. But it all is about scale and so on, and so I think that's a decision that Algonquin will ultimately have to make. But certainly it's something that we're open to discussing with them because we are committed to that strategic investment relationship which actually says that we would work together in that way.

And when you look at small utilities, utilities under CAD250 million like Calpeco, it's a perfect fit for them to completely have that investment. But we're going to have to make sure that the California Public Utilities Commission is comfortable with that, and so we'll work together with them to make that progress. But yes, that size of utility we would like to see in Algonquin's hands.

Okay. Great. Thanks very much.

Thank you.

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

Great. Thank you. Just first on Nova Scotia Power, just want to make sure I understand the agreement to apply the tax from last year against the FAM balance. Does that mean that you're going to have one less tool to manage earnings in 2011? Or am I thinking about it the wrong way?

Well, the tax amounts arose from the renewable investments that we made in 2010. And at the end of the year we got approval from the regulator to carry those amounts forward, subject to a decision on how those amounts would be used at some point in 2011. After the end of the first quarter, we recommended to the regulator that those amounts be used to pay down the fuel deferrals from 2010, and we also worked with other stakeholders to come to an agreement across the board that that was the best use of that funding. So that's what the final decision was, and we're quite happy with that.

I was just wondering, was there a thought, though, that some of those tax -- the ability to reduce the tax was one of the reasons why you felt you didn't need to apply for rates in 2011, that you would have had that ability to reduce your tax balances?

That was -- it's always been a part of our plan to defer rate increases for customers as long as we could. These amortization mechanisms have been a part of that plan. But at the end of the first quarter, as you know, the seasonality aspect of our business, most of our earnings happen in the first quarter of the year. And at that point we were -- we had a reasonable anticipation that we would be within our band for the year and, therefore, it was prudent and appropriate to suggest that those be used for fuel deferrals.

And I think, Robert -- it's Chris -- so what that means is that fuel will actually end up in reducing costs in 2012 for customers, and so it is very helpful as we're going into this rate case to have that be in 2012.

Right. So just to summarize, you felt really good coming out of Q1 that you didn't need the tax to make the range for 2011 and, therefore, they're going to help out the 2012 rate case you decided to apply it against -- or you felt comfortable applying it against 2012 rather than needing it for 2011?

Yes. We were very happy that the regulator and stakeholders have been flexible over the last couple of years, helping to work through this strategy of smoothing for customers.

I'd say, Robert, as comfortable as you can be. Obviously there's always things that come along but we're as comfortable as we can be that we're in the band.

Okay. And then just the last question I've got, the outlook section you have for the services talks about, you're expecting it to be higher year over year but part of that is due to the gain. Do have you a sense as to what the outlook would be if you normalized for the gain in Q1?

I would say directionally it would be more in line with consistent year-over-year and I'll explain that a little more fully. The services business, the trading business has had a very strong Q1 and continues to do well in 2011. The Bayside power plant is also in the mix, and we are -- it's our intention to get the normal -- I'm going to get into some accounting issues here -- but normal purchase, normal sale exception on Bayside summer contracts, so that would be a change in how we account for Bayside, i.e. we would no longer be marking those contracts to market. So that would cause Bayside to look lower compared to last year. So I think those 2 things will kind of offset. So directionally I would kind of line up with last year.

Okay. And then with the resegmentation, what is the base number for 2010?

I'm sorry, Robert, I don't understand that question.

Now that you've broken out service, renewables and other, can you just remind me what the 2010 base or the comparable earnings number would be.

Okay. Just a moment. Sorry. Sorry, Robert. We'll find that, too. We've got a lot of new numbers in my head.

Okay. Great. Thank you.

Thanks, Robert.

Thank you. The next question is from Paul Lechem with CIBC. Please go ahead.

Thanks. Good afternoon. Just wanted to ask a little bit more about the Northeast Energy Link and the proposal you filed with the FERC in terms of the funding approach. Can you just walk maybe through a little bit what you're trying to do here and the next steps along the way?

Gerry, you want to go ahead?

Sure, certainly, Paul. So what we really asked the FERC to approve was basically a funding approach towards funding the project, which we believe is consistent with and similar to other funding approaches for other projects. So what we're really trying to do is establish a commercial model by which we can move the project forward. Really next steps would be to work out transmission services agreements with anchor shippers and then ultimately anchor shippers would sign PPAs with utilities customers, anywhere in New England, essentially.

And I think, Gerry, it's fair to say that the thing we want to confirm with the FERC is that it's okay to have this priority arrangement with these shippers on an open access basis, that then they can get access to the line when they need it. Is that a fair way to describe it?

That's right.

So I think, Paul, that's the biggest thing, we're making sure with the FERC that that's the case. And as you can see in the documents, First Wind has been the first shipper to step up for this and that actually was going on prior to our most recent transaction with them. But as well, we see organizations like Nalcor being interested ultimately down the road as well. So it's quite interesting, especially as the New England governors are getting more interested in this energy, and in managing the costs of renewables, it's interesting to see how this will begin to evolve. We need to know from the FERC this is going to work.

And I'll just add, Chris, that this is not a new commercial model. Other projects have moved forward with these commercial models, and have been approved by the FERC, so we're confident that our commercial model is similar to others that they have already approved.

And what kind of time frame are you expecting to hear back from the FERC?

Towards the end of this year.

Okay. Then just quickly on -- apologize if this has been answered already. I dropped off here for a second. The utilities services business has had a bit of a weak start to the year. Can you talk about what's going on there and what the outlook is for the rest of the year?

So I would characterize it as they had a very, very busy year last year and that is a -- that's I guess a building business, is how I would describe it like literally and figuratively. So they have had -- they're in the sales and contracting mode all the time. They're currently looking for -- in the running on some large projects, but things have been a little bit slower this year than they were last.

And so this year over last year that's certainly the case. But if you look at their history over time, they've tended to be neutral in the first half of the year and then make their earnings in the second half of the year. That's pretty classic for them. And what they're doing right now is actually stepping into a few new areas, so they're actually doing a lot of work right now in the Caribbean, which we're very happy about. There are a lot of activities down there that they're quite suited for, so they're focusing there right now.

They're also preparing for the build that is expected to happen as we move into the 2015 time frame, and there's quite a bit of opportunity around that. And so there will start to be projects next year and the next year relative to the wind build in that time frame. And as well, obviously, they're very interested in the work in Newfoundland as that begins to start to happen and so they're focused there. So there's a lot of preparatory work going on right now and it's pretty classic to how they've been in previous years.

That's great. Thank you.

Thanks, Paul.

Thank you. (Operator Instructions).

Folks, it's Judy. I'll follow up on a couple of items. Juan was interested in the mark-to-market in Brunswick Pipe. So in terms of the Q2 2011 results, there's very little mark-to-market in there but the change quarter over quarter was about CAD1.9 million on the mark-to-market on the currency hedges. We realized that we will have to do a little bit of resorting in order to assemble the 2010 number for services, renewables, and other in a way that's comparable to how it's grouped now. So Jill will take that offline and send out a little note to everybody, so everybody has a starting point for that number. Sorry about that, folks.

We'll post it on the website.

Yes. So that's just -- we have reclassed things and we just want to make sure that we've got it 100% right before we circulate it.

Thank you. (Operator Instructions). We have no further questions registered at this time. I'd like to turn the meeting over to Mr. Huskilson.

Thank you very much, Dave. Just like to thank everyone for their participation today and their interest in Emera and hope everyone has a great weekend. Thank you all very much.

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