Emera Inc (EMA) 2011 Q3 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.

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; 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 third-quarter earnings release was distributed earlier today via NewsWire, and the financial statements in 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 third 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 will 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 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.

Now, I will turn things over to Chris.

Thank you, Jill, and good afternoon, everyone. Consolidated earnings for Q3 of 2011 were modestly higher at CAD40.8 million, compared to CAD40.3 million in the third quarter of 2010. Earnings per share were CAD0.33 for Q3 of 2011, versus CAD0.35 for Q3 of 2010, reflecting the fact that we issued additional shares in Q1 of this year. Year-to-date consolidated net earnings increased more substantially to CAD194.4 million, or CAD1.61 per share, compared to CAD172.6 million or CAD1.51 per share for the same period in 2010. Judy will take you through the details of the quarter later in the call.

There were several developments in the Company in Q3, and I want to take a moment to review them with you. First, Emera Energy is working through the regulatory process in Maine associated with our pending First Wind acquisition. This regulatory docket continues to move forward on all fronts, with a decision from the MPUC now expected in Q1 of 2012. Also in Maine, the 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.

Moving now to Newfoundland. Substantial progress has been made to advance the Lower Churchill project. We're very pleased that the Federal Government signed a Memorandum of Agreement to provide a loan guarantee for the project. We expect that this loan guarantee will lower project costs through reduced interest rates, and this benefit will flow directly to electricity customers in Nova Scotia. In addition, the Joint Review Panel responsible for reviewing the Lower Churchill project completed its environmental assessment, and has submitted its report to the federal and provincial ministers of the environment. The report, prepared by the panel included environmental assessments for the Muskrat Falls generating station, the Gull Island generating station, and the transmission lines connecting Muskrat Falls, Gull Island, and the existing Churchill Falls hydroelectric facility. Both departments are now reviewing the Joint Panel's report, and we would expect to have a decision by Q1 of 2012.

The environmental assessment for the Labrador-Island link is well under way. We would expect to make an initial filing for the Maritime Link environmental assessment by the end of this year. The definitive agreements for the project are progressing well, and we expect to be finished with this work by the end of the year as well.

In Nova Scotia, Nova Scotia Power reached a settlement with customer representatives, relating to its general rate application for power rates in 2012. The settlement agreement is currently being considered by the regulator for approval. The settlement included a return on equity range of 9.1% to 9.5%, down slightly from our previous range.

The settlement also included a clause that will allow Nova Scotia Power to defer any fixed costs that it incurs due to the absence of the NewPage Port Hawkesbury mill until 2013. The NewPage mill is currently shut down and under bankruptcy protection, while a new owner is sought. As a result of the mill's shutdown, Nova Scotia Power has taken over the 60-megawatt biomass project that is currently being constructed at the mill. This project was a partnership with NewPage, but the contracts all considered the possibility of a shutdown, and included arrangements for how the project would continue in NewPage's absence. On the renewable front, Nova Scotia Power remains on track to meet the Province's renewable energy targets by 2015.

In the Caribbean, we're pleased to have deployed two of Emera's senior leaders there. Starting in the Bahamas, we placed Sarah MacDonald as the new CEO of Grand Bahama Power Company. Formerly Emera's Executive Vice President of Human Resources and Chief Executive of Emera Utility Services, Sarah is leading the turnaround initiative on the island.

We recognize that there are challenges that cannot be fixed overnight. In recent years, electricity has not been reliable on Grand Bahama. 2011 marks year one of our turnaround plan, and we're already seeing operational and financial improvements. Outages are down significantly, and construction is under way for a 52-megawatt diesel generating plant that will improve system reliability and the cost structure for electricity. We expect to see this facility online in Q3 next year. We're focused on the job at hand, and will work to medium- and long-term solutions for Grand Bahama, and for reliability and lower-cost electricity.

In Barbados, we recently placed Bob Hanf as Executive Chairman of Light and Power Holdings, and a Director of Barbados Light and Power. Prior to these appointments, Bob served as Emera's Chief Legal Officer and President of Bangor Hydro. He's supported by Mark King, a long-term BLP employee, who was recently named Managing Director of Barbados Light and Power. Bob's mandate in Barbados is to develop a clean energy strategy for the island, where we will be working closely with all stakeholders to ensure success of the Nation's renewable energy and energy efficiency plans, which is expected to be introduced into legislation in early 2012. We remain focused on developing individuals in leadership roles, and on working with government and the regulator.

Also in Barbados, we're in the process of completing the sale of LUCELEC to Light and Power Holdings. Formed as a holding company, Light and Power Holdings was created to allow shareholders to take full advantage of potential investment opportunities in and outside Barbados, including equity investments such as other utilities. The acquisition of 19.1% of LUCELEC is consistent with this mandate.

In light of our strategic progress and strong results, we're very pleased that the Board of Directors approved an increase in our annual common share dividend from CAD1.30 to CAD1.35 within this quarter. The increase is supported by very strong growth in operating cash flows. In fact, cash flow from operations increased 52% to CAD362 million in 2011, compared to CAD238 million for the same period last year. Our cash coverage on our dividend is just over 3 times now, up from just over 2.5 times in 2010.

With that, I'll turn things over to Judy, who will give you a more detailed update on our financial results.

Thank you, Chris, and good afternoon, everyone. Our third-quarter financial results were released earlier today, and are on the Emera website. As Chris mentioned earlier, Emera's consolidated net earnings were CAD40.8 million in Q3 2011, compared to CAD40.3 million in Q3 2010. Our increased investments in our two Caribbean utilities added approximately CAD8 million of earnings quarter over quarter, and we had small gains as well in Nova Scotia Power and Energy Trading. However, Bayside Power recorded a CAD7 million negative swing quarter over quarter, reflecting the reversal of mark-to-market gains from 2010. And foreign exchange expense was also CAD4 million higher compared to the third quarter of last year, due to the revaluation of US dollar liabilities at the quarter-end FX rate, which popped to CAD1.04 at September 30, 2011, a CAD0.075 movement in the quarter, but has since fallen back CAD0.05 to CAD0.99.

Despite earnings being slightly higher, reported earnings per share were slightly lower at CAD0.33 in Q3 2011, compared to CAD0.35 for Q3 2010, which reflects, as Chris noted, the fact that we issued additional common shares earlier this year. Nova Scotia Power contributed CAD21 million to consolidated net earnings in Q3 2011, compared to CAD18.6 million in Q3 2010. The increase was primarily due to decreased income tax and OM&G costs, partially offset by decreased electric margin, which reflected reduced sales to the industrial customer class quarter over quarter.

Maine utility operations contributed $9.4 million to consolidated net earnings in Q3 2011, compared to $11.5 million for the same period in 2010. This decrease was due to lower revenue as a result of cooler temperatures year over year, which reduced air conditioning load. Maine Public Service, which we acquired in late 2010, was not a significant factor in the Q3 results. That utility typically generates a majority of its revenues and earnings in the winter months, due to the impact of heating load, and a seasonal rate adjustment that kicks in November 1.

Caribbean utility operations contributed CAD10.7 million to consolidated net earnings in Q3 2011, compared to CAD2.8 million in Q3 2010. The increase is due to increased investments in both Grand Bahama Power Company, and Barbados Light and Power. For most of 2011, we owned approximately 80% of each utility, about twice as much as we held in 2010.

Pipelines contributed CAD7 million to consolidated net earnings in the third quarter of 2011, compared to CAD8.1 million in Q3 2010. The decrease is due to changes in the mark-to-market on currency hedges, and a decrease in financing income. Services, renewables, and other investments contributed CAD2.3 million to consolidated net earnings in the third quarter of 2011, compared to CAD6.7 million in Q3 2010. As I noted earlier, the decrease was primarily due to the reversal of mark-to-market gains on 2011 summer contracts that Bayside recorded in 2010. We're now accounting for Bayside's contracts as normal purchase/normal sale arrangements, so once we're through this transition year, Bayside's results will be more directly reflective of the commercial and operational success of the plant.

An additional note on Bayside -- we're investing just over CAD22 million of capital into the plant in 2012 to add 29 megawatts of capacity, and improve the plant heat rate. The resulting incremental revenue will flow straight to the plant's bottom line. So we're gradually making improvements to get that facility to the point where it's giving us the performance that we want.

The corporate segment had a loss of CAD9.6 million in Q3 2011, compared to a loss of CAD7.4 million in Q3 2010. The higher loss is primarily due to the CAD4 million increase in foreign exchange expense that I spoke of earlier, partially offset by lower deferred compensation expense and savings in some other areas.

Finally, and as a bit of a follow-up to our Q2 conference call, I think it's worthwhile for me to spend another few minutes reviewing the impact of the restatement of our 2010 earnings from Canadian GAAP to US GAAP, in order to help investors get a better understanding of the change in earnings year over year. When we normalize our 2010 Canadian GAAP reported earnings number of CAD1.68 for the Bear Swamp mark-to-market loss that year, and the CAD22.5 million accounting gain recorded on our purchase of Light and Power, our 2010 reference point for EPS under US GAAP is CAD1.55. When we look at our overall forecast for this year, 2011, we normalize for Bear Swamp's mark-to-market, which isn't much so far this year, and the CAD28 million gain recorded this year on our purchase of Light and Power Holdings. When you compare that normalized 2011 number to 2010's CAD1.55, we expect to exceed our 4% to 6% EPS growth target. I highlight that we are including the CAD12.9 million after-tax gain we recorded in Q1 of this year on the exercise of Algonquin subscription receipts in our EPS forecast for 2011. If we exclude that amount, our 2011 EPS forecast is within our 4% to 6% growth band, when compared to the normalized 2010 amount of CAD1.55 I referred to earlier.

That's all for my financial overview, and just before we get to your questions, I'm going to take a moment to promote our first institutional Investor Day, which we will be hosting at the Design Exchange in Toronto on Tuesday, December 6. Chris and I will be there, but we'll be bringing some of our friends from the Emera family, including the executive leaders of Nova Scotia Power, Bangor Hydro, Emera Energy, and Emera Newfoundland. They're all looking forward to the opportunity to talk about their businesses with analysts and investors, and I believe the audience will be impressed by the depth of the broader leadership team in our organization. The save-the-date notices have been sent out, and invites are going out next week, so you can follow up with Jill if you'd like further details on the event.

Thank you, and now we'll be happy to take your questions.

Thank you. We'll now take questions from the telephone lines. (Operator Instructions). Our first question is from Juan Plessis from Canaccord Genuity. Please go ahead.

Thank you very much. Judy, I know you talked about Bayside Power, there's a CAD7 million swing for the reversal of mark-to-market gains. Was that CAD7 million all in that quarter?

Yes, it was, Juan.

Okay. Thanks for that. And Chris, your 2011 CapEx budget for Nova Scotia Power is down slightly. Is this just due to timing and should we expect to see that show up in 2012?

The swing in 2011 is just normal -- the normal swing that you would expect in any year around just our ability to complete the capital work in this calendar period. We forecast in 2012 that there will be a slight reduction and that reflects some of the changes that are happening here in the Nova Scotia market and the need for renewable energy so we're just positioning and preparing. There will be a small reduction next year, but there will be a downward trend.

Thank you very much.

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

Thank you. Just on the Port Hawkesbury biomass. Maybe, I'm not sure something's changed, but I recall when the original agreement or the original regulatory approval was received, there was a cap on the capital cost of that project. Is that still in place? And if it is, what's the project outlook going forward on that front?

There wasn't a specific cap put on the project from the regulatory point of view but there was a limit put on for costs incurred for arising out of a failure, a financial failure of NewPage. Because of that, through the regulatory process and through the construction of the contracts that are in place for that project, we incorporated a risk mitigation plan in the event that there was a financial problem at NewPage. That included security that we have in place in the form of letters of credit to make sure that there's ample contingency in place, so that the project will not cost more.

So just I guess bottom line from a kind of regulatory or earnings perspective, there should be no impact whatsoever from what's going on?

No, if there's a cost incurred on the project because -- or delays because of the financial situation at NewPage, those costs will be recovered through the letter of credit that we have in place.

Okay.

And I think Robert, with the amount of money left to be spent and the amount of this coverage, we feel pretty comfortable at this stage.

Okay. Just moving to the utilities in the Caribbean, last quarter you gave annual earnings guidance of CAD18 million to CAD20 million. Just with the quarter, is that still good?

Yes, directionally, yes.

Okay. And just the last question I've got, just to clarify on Bayside. So you had the CAD7 million swing in this quarter. Was there any other amounts in Q1 and Q2?

Let me -- refresh my memory there, Robert. Yes, so it's actually substantially more. The year-to-date number on the mark-to-market swing is over CAD11 million negative.

CAD11 million negative. And because this relates to a prior period, is this -- how much of this would reverse as we think of 2012 and the switch over and how you're accounting for this?

So it will all -- it will kind of come to an end at the end of 2011. We've changed the accounting.

So because you're taking the hit this year --

Yes.

Does that mean all things being equal, that the segment's up? You're starting up CAD11 million?

No, I'd say we're starting flat. We had CAD5 million mark-to-market gain last year, effectively that rolls off this year, which if it was nothing else in the business would be negative CAD5 million. Between those two numbers that's where we're getting the CAD11 million change, and so we're starting January 1, 2012 on kind of a purely operational electrons sold, less cost of gas in and that should be the results.

So Bayside's results for 2011, all things being equal, will be the same in 2012, or will they be adjusted for this mark-to-market loss that you've taken this year?

So they will be -- so what's happening, the 2011 mark-to-market loss is the reversal of what was booked in 2010. So we'll be clear of it all at the end of 2011, and Bayside 2012 results will be a function of how many megawatts is sold at what price.

Okay. You know what? Maybe I'll follow up after the call.

Sure.

I think effectively, Robert, you actually come back halfway. So in fact, you'll expect to see that recovered by about 50% of that amount. That's the relative number. But effectively, you can calculate that just by looking at gas spreads, against that power plant.

So all things being equal, you're up CAD5 million year over year as you head into 2012, plus or minus whatever happens at the business.

Effectively. That's order of magnitude where we would be, that's right.

That's perfect. Thank you.

Thank you. Following question is from Matthew Akman from Scotia Capital. Please go ahead.

Hey, guys. Question on the fuel adjustment. Where do you expect to be by year-end on fuel adjustment at Nova Scotia Power?

Matthew, Rob here. It looks like it will be at this point between CAD24 million and CAD28 million. We're coming into the colder period of the year so there's -- excuse me, Matthew. Just let's be sure about which number you're talking about, whether it's the total amount of outstanding FAM or the incremental contribution to the FAM amount for 2011?

I guess I'll take both.

Somehow I knew you'd do that. One of them is the smaller one is this year's contribution, which is about CAD24 million at this point, and the outstanding amount at the end of the year we forecast to be about CAD89 million in total.

Thanks for that. Chris, you mentioned that there's some discussions that are going on that are going well around the final terms and conditions of the agreement with Nalcor, I think. There was an MOU on that was pretty specific. Are there any significant departures that we might expect to see from the MOU terms?

No, there aren't. I think the way that I would put it is that the principles we put forward in the term sheet originally have really borne us very well as we've gone through the detailed discussions. And we haven't seen any kind of differences between us, as we've worked out those details. So the way that we see this happening is the November date, which we had in the term sheet, we'll get to the majority of the major contracts, and we feel that those will be in very good shape and then we're very hopeful we can wrap up some of the other details by the end of the year. So we're feeling quite good about the way this is coming together. The teams are working extremely hard to make sure we get all these details worked out, and it's proceeding very well. So in principle, we're very aligned to the term sheet and the details are coming together.

Okay. Thanks. I just had one last question on Maine and Maritime. I know this is a seasonally-weak quarter, but is the utility generally on track for what you anticipated when you acquired it?

Yes. This is Gerry from Bangor-Hydro and Maine Public Service. I would say the utility is performing as expected, both from a reliability and a financial point of view.

And I think we're seeing a little bit of weakness there, but that's primarily because we had a number of change of control contracts exercised. We were kind of hopeful that we would retain a few more of the senior people, but I guess those change of controls are a little too good, so we've seen them exercised. That's really caused a little tiny bit of weakness, but it's that one-time nature.

Additionally, we're lost revenue from a generating facility that will be trued-up with the next transmission rate filing in June of 2012.

Thank you very much. Those are my questions.

Thanks, Matt.

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

Hello. Good afternoon.

Good afternoon, Michael.

Just got a quick question on First Wind. You mentioned that the approvals there are going to be pushed back into the first quarter of 2012. Just wondering, is there anything specific that's causing the delay?

There isn't really a delay, that's not exactly true. Effectively, there's been a tremendous amount of IRs and information exchanged on this subject, and so what we're finding is that in order to process all that information on both sides of the case, the regulator has delayed the hearing by about a month. But we had always -- had anticipated that it could be as late as January before the project got fully approved. So it really is just that we're now quite certain it will be in the early part of the year, and so it really is just about that magnitude of information, and the fact that there are a number of different issues that we're sorting through with stakeholders. So it's an important case from our perspective, because what we're really doing here is looking at advancing our overall strategy for the business and the region. It's important to us that we can participate on the generation side in the holding company. And so we're just very carefully moving through and making sure that the Maine Public Utilities Commission has all the information they require to make this decision.

Okay. Great. Thank you.

Thanks, Michael.

Thank you. (Operator Instructions). The following question is from Paul Lechem from CIBC. Please go ahead.

Thank you. Good afternoon.

Good afternoon, Paul.

Maybe just continuing on that thought, Chris, about First Wind, can you talk maybe about the projects, the two projects under construction, are there any others, and how those are progressing, any others in the queue for further development? Are there any upcoming agreements made in terms of contracting any of these projects?

I think first of all, both of the projects that were under construction have begun producing now. One of them in June, and one of them just recently. And so we're beginning to start to see production from these projects in general. From a contracting perspective, we're actually quite happy with where we are right now, on the contracting side. I think there have been some minor additional contracts put in place, as the time has moved forward. But we're generally very comfortable with where we are on the contracted nature of the first 370 megawatts.

Relative to other projects, we actually have a queue that extends as far as 1,200 megawatts of additional potential. Of that, there are probably three or four projects that are advancing within the next 12, 24 kind of month time frame. And again, we're just watching those projects carefully. Part of the criteria, in order to get one of those projects into our investment, our joint venture, is that they have to be contracted to an equivalent amount of the rest of the fleet. So when we look at that, that's all part of what has to happen, and so there's a lot of work going on, both on the development front, and on the contracting front. So if you do see another project enter into the joint venture, then it will have a very, very similar nature to the ones that you see today.

Thank you. And with the associated transmission, the filing you gave to the FERC on your Northeast Energy Link, can you give any idea of next steps like when would FERC be getting back to you and where does it go from there.

I think Gerry's probably best-positioned to answer that.

We're expecting to hear a decision on the declaratory order that we filed at FERC sometime before the end of this year.

And then what would be next steps beyond there?

Then I think the two key next steps are to negotiate a transmission services agreement with First Wind, which would be contingent upon the execution of some purchase power agreements that First Wind would look to procure with New England load.

And really, there's some of the energy that would exist today, may move on this line, but fundamentally First Wind will be looking to put new projects on this line. Generally speaking, they don't -- they have homes for all the existing projects, and so it's really about incremental projects, and as I said, they have a number of those projects in the queue right now.

That's great. Thank you very much.

Okay, thanks, Paul.

Thank you. There are no further questions registered. I'd now like to turn the meeting over to Mr. Huskilson.

Thank you very much, and thank you everyone, for participating today and your interest in Emera. Just want to remind you one more time, as Judy did, that our Investor Day is on December 6 in Toronto and we look forward to seeing as many of you there as we possibly can, and I hope you all have a great weekend. Thank you very much.

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