Emera Inc (EMA) 2011 Q4 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.

Good afternoon, everyone. And thank you for joining us for our fourth quarter and year end 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 and Maine Public Service.

Emera's fourth-quarter and year-end earnings release was distributed earlier today via NewsWire, and the financial statements and management's discussion and analysis are available on our website at Emera.com. This afternoon, Chris will begin with a corporate update and then Judy will review the financial results in 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'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. Now I will turn things over to Chris.

Thank you, Jill, and good afternoon, everyone. 2011 was a great year for Emera. We had another record year for earnings, we delivered strong shareholder returns, and we made significant progress on our strategy. Consolidated net earnings for 2011 were CAD241.1 million, or CAD1.99 per share, compared to CAD190.7 million or CAD1.67 per share for 2010. Normalized for one-time accounting gains and Bear Swamp mark-to-market adjustments, we delivered 14% growth in earnings per share year-over-year, exceeding our goal of 4% to 6%. We were very pleased with this result. Judy will take you through these results and the details of these results in the quarter and the year-end later in her remarks.

We had many successes in 2011 and I want to take a moment to review some of them with you. I also want to spend some time on our strategic outlook, where our focus is on providing energy solutions in all our service territories. Beginning in Nova Scotia, Nova Scotia Power successfully settled its 2012 rate application. Working with stakeholders to present a solution that the utility and review board was able to approve. New power rates took effect on January 1, and for the average residential customer, the new rates represent an increase of roughly CAD7 per month. Importantly, the settlement also provides Nova Scotia Power with some protection from the loss of its largest customer segment, pulp and paper. One mill has currently suspended operations, and is under creditor protection. SPI is able to defer any fixed costs that it incurs due to the absence of that customer until 2013.

Nova Scotia Power's renewable energy transformation is well on track, having finished 2011 with 17% of our electricity coming from renewable sources. In addition, CO2 emissions for 2011 were the lowest for Nova Scotia Power since 1999, and the percentage of coal and heavy fuel oil in Nova Scotia Power's generation mix was the lowest in the Company's history, at 57% of total generation. Emera Energy continues to work through the regulatory proceeding in Maine associated with the pending First Wind acquisition, and our increased ownership in Algonquin Power & Utilities Corp. The case before the MPUC is ongoing, and as a result, we will limit our comments to say that we are actively pursuing an approval of both transactions. The next formal step in the proceeding will be a decision of the commissioners on February 14, regarding certain procedural matters. The deliberations on the 14th do not include a decision on the transactions.

Our Maine utilities had a solid year in 2011, and the integration of Maine Public Service is going well. Looking forward, a focus in Maine is on increasing the use of electricity for home heating. In Nova Scotia, almost 90% of new homes have electricity-based heating sources, where technologies such as heat pumps and storage systems provide customers with a reasonably-priced reliable alternative to oil. Conversely, the Maine market is currently dominated by oil, so there is real opportunity for us to increase our market share and to drive investments and growth in our distribution business. We're working with both state and federal stakeholders to make these electric heating solutions a reality for customers. Electricity can be a domestic source of clean, reliable and cost-effective energy for our customers.

A priority in New England is finding generation sources to utilize our proposed Northeast Energy Link project. Our MOU with First Wind gives us a large pipeline of wind projects for the line. Firm sources of supply are needed to complement wind, and efficiently utilize the line's capacity. We're confident that our relationships throughout the region will help us round out the supply picture to support this project.

Moving now to the Caribbean, we are very pleased with the progress that we're making. In Grand Bahama we executed year one of a three-year turnaround plan. Outages are down significantly, and construction continues for a 52-megawatt diesel generation plant that will improve system reliability and the cost structure for electricity. This construction project is currently six weeks ahead of schedule, and we expect to see this facility online by June of this year.

In Barbados, we remain focused on developing a clean energy strategy for the island, where we will be working closely with all stakeholders to ensure the success of the nation's renewable energy efficiency plan, which is expected to be introduced into legislation early this year. A strategic initiative for both Caribbean utilities is the evaluation of alternative fuel sources to reduce island dependence on oil. Alternatives being evaluated include CNG, LNG, sub-sea transmission, and renewable projects. Securing lower-cost fuel sources has the potential to lower electricity prices for consumers, and thereby stimulate these economies. Reducing oil dependence will also minimize the strain on the island's currencies by reducing foreign currency payments, while at the same time, reduce the carbon footprint on the islands significantly.

In Newfoundland, substantial progress has been made to advance the Lower Churchill project. In August, we were pleased that the Federal Government signed a memorandum of agreement to provide a loan guarantee for the project. Most recently, the Federal Government has appointed a financial advisor to assist in developing the terms of this agreement. We expect that this loan guarantee will lower project costs through reduced interest rates, and this benefit will flow directly to electricity consumers in Nova Scotia.

In December, we made the initial filing for the Maritime Links environmental assessment. It has recently been determined by the Canadian Environmental Assessment Agency that the Maritime Link project qualifies for a screening level assessment rather than a comprehensive study, due to the lower level of transmission system voltage. In addition, because much of the Link follows existing rights of way, the process for approval by Newfoundland is simplified. We expect the environmental assessment process to be completed within 12 to 18 months from start to finish. Lastly, the definitive agreements for the project are progressing well. The project is continuing, and we are looking forward to seeing Muskrat Falls sanctioned this year.

With that, I'll now turn things over to Judy, who will give a more detailed update on our financial results for the quarter and the year. Judy?

Thank you, Chris, and good afternoon, everyone. Our fourth-quarter and year-end results were released earlier today and are on the Emera website. As Chris mentioned earlier, Emera's consolidated net earnings were CAD241.1 million in 2011, or CAD1.99 per share, compared to CAD190.7 million or CAD1.67 per share in 2010. Both 2011 and 2010 results include accounting gains on our acquisition of Light and Power Holdings, CAD28.2 million and CAD22.5 million respectively. When normalized for these gains, and the Bear Swamp after-tax mark-to-market adjustments, 2011 earnings were CAD213.7 million, or CAD1.77 per share, compared to CAD176.8 million, or CAD1.55 per share in 2010.

Higher earnings are primarily due to increased investments in our two Caribbean utilities, which added approximately CAD21 million to earnings in 2011, and we also realized a CAD12.8 million after-tax gain on Algonquin subscription receipts in Q1 2011. Consolidated net earnings for the fourth quarter of 2011 were CAD46.8 million or CAD0.38 per share, compared to CAD24.1 million or CAD0.21 per share for the same period in 2010. The higher earnings in the quarter were primarily a result of our increased investment in the Caribbean. Nova Scotia Power contributed CAD123.5 million to consolidated net earnings in 2011, compared to CAD119.2 million in 2010. The increase is primarily due to CAD23.3 million of income tax recoveries, arising from the amendment of prior-year tax returns.

Taxes are a big story and NSPI for 2011, so I will take a moment to elaborate on that item. I have to start by talking about amortization expense. In 2010, NSPI recorded more amortization expense than required, relating to its Section 21 income tax asset, CAD14.8 million more, to be exact. The UARB approved this accounting, and agreed that because this extra expense was recorded in 2010, NSPI could reduce its amortization in 2011 by that amount, if that was necessary to enable it to earn within its allowed range.

For most of 2011, our expectation was that we would be utilizing that opportunity. Here's where taxes come in. In its 2010 tax return, Nova Scotia Power changed its tax treatment for routine capital expenditures, to provide for a faster write-off of these amounts. In Q4 of 2011, NSPI elected to refile tax returns for prior years, specifically 2006 through 2009, to reflect the new filing position taken for 2010. This resulted in the CAD23.3 million tax benefit which was recorded in Q4. It also resulted in NSPI earning at the top end of its allowed range, without utilizing the CAD14.8 million amortization holiday carried over from 2010. In the course of settlement negotiations on 2012 rates, it was agreed that NSPI could carry forward its amortization holiday into 2012. So, all that said, NSPI was still earning within its allowed range, without the tax benefits it booked in Q4 and it is starting 2012 in a strong position, with an almost CAD15 million positive regulatory carry-over, and a 5.1% rate increase in place as of January 1.

Maine Utility operations contributed $37 million to consolidated net earnings in 2011, compared to $31.9 million for the same period in 2010. Higher earnings are primarily due to decreased OM&G expenses in Bangor-Hydro, as a result of an increase in capitalized construction overheads. Essentially, Bangor-Hydro had a larger capital program this year than it did in 2010, so a greater amount of overheads were applied to capital projects. In addition, the Maine utilities had a full year of earnings from Maine Public Service. We acquired this utility late in 2010, and therefore, it was not a significant factor in the prior-year results.

Excluding the impact of the accounting gains previously noted, Caribbean utility operations contributed CAD18.6 million to consolidated net earnings in 2011, compared to a loss of CAD2.7 million in 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. We also had to expense CAD6 million of acquisition costs on these expenses in 2010.

Pipelines contributed CAD27.9 million to consolidated net earnings in 2011, compared to CAD28.9 million in 2010. The decrease is due to lower equity earnings from our maritimes and northeast pipeline, as a result of slightly lower toll rates. Services, renewables, and other investments contributed CAD27 million to consolidated net earnings in 2011, compared to CAD8.6 million in 2010. If we exclude the effect of the mark-to-market adjustments in Bear Swamp, this segment contributed CAD27.8 million in 2011, compared to CAD17.2 million in 2010. The difference year-over-year is primarily due to the gain we realized on Algonquin subscription receipts in the first quarter as I previously noted.

Finally, Emera continues to generate strong cash flows from operations, with CAD400 million as at December 31, 2011. These strong cash flows provide us with secure cash coverage on our dividend and will help fund a large portion of this year's capital plan. So that's it for my financial overview, and now we'll be happy to take your questions.

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

Just on the First Wind, it seems that the amount that you expect to invest has gone up slightly. I think initially it was CAD333 million, and in the filings today it shows CAD353 million for the Northeast Wind. Can you go over what's changed in the last few months here?

So, we're making an additional investment in some tax equity, Paul. That's the primary difference between those two amounts.

Okay. And Chris, you mentioned that on the 14th, there's a procedural review. When do you believe that a decision on the project might be forthcoming from the MPUC?

I think we'll have some more insight after the 14th, Paul, but it's just a little bit hard to predict at this point. So, we're just working our way through the process. We're respectful of the process. It's one that we're quite familiar with, and so we're working our way through it, and we'll know as we get through the 14th.

Okay. In the outlook section of the filings, it mentions that you expect your services, renewables and other segments to be consistent in 2012 with 2011. Is that consistent with the numbers as reported, or excluding the gain from Algonquin sub receipts?

It would be consistent with the numbers as reported, assuming that we are -- that we gain approval to increase our investment in Algonquin. That's in the subject of the MPUC hearing currently. So, we have -- our forecast would include some amounts on the exercise of those subscription receipts, and would also assume that by the end of the year we would have a 25% position in Algonquin. So, it is dependent on those transactions, but at this point, that feels like the right outlook.

Okay. Thanks. I'll hand it over from here. Thank you.

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

Thank you. Just in regards to the First Wind acquisition, and the issue of increasing your ownership in Algonquin that are both in front of the Maine Public Utilities Commission. Can you tell us what options or strategy you might pursue if you were to receive a negative regulatory decision on those?

No, Juan, we're not going to speculate on where we are with that. We are in the middle of the process. We're following the process as proscribed, and we're looking forward to the outcome. I think that's the most that we're going to say on that today.

Okay. Thanks for that. And with respect to MPS, it contributed $2.7 million for the year. Can you tell us if this contribution was net of financing the acquisition?

Yes, it would be.

Okay. So, there's no additional interest expense at the corporate level that would [bring] that down?

No.

Okay. Great. Thanks very much.

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

Thanks very much. Chris, can you maybe just expand on Muskrat Falls? And I guess what, in a nutshell or in summary, in your mind is causing -- caused you guys to announce the delay in reaching an agreement there?

Matthew, it really just is the complexity and the amount of work. I guess, we're almost counting pages now. We're into thousands of pages in these agreements, and we want to make sure that we get through it properly, that we get them as they should be, and that we give the teams the time that they need to do the work. And so it really is just that.

We are continuing to work on the project. We were advancing. We are spending money every day on that project, and we're continuing to advance all the different areas that we need to. As I said in my remarks, we've made the environmental application. We've got some -- we have received some good news on how that's proceeding. We're very happy about that.

We're working closely with Nalcor, and I think building a very tight relationship between the companies, and the process is moving forward. I think we were quite pleased to see Manitoba Hydro International put forward their recommendations and their endorsement of the activities at the end of January, and all those things are positive towards the activity. So, it's nothing other than the simple amount of work that's involved there.

Thanks for that. Shifting to Nova Scotia Power, there's a disclosure that I guess the negotiated settlement placed you guys recovering over CAD60 million of the FAM deferral in 2012. Based on what you're seeing of fuel costs going into 2012, is that your expectation, that you'll earn the allowed ROE and recover over CAD60 million of that deferral in 2012?

Yes, we expect to [earn] within our allowed range, and that FAM deferral amount is programmed into rates for recovery this year.

Thanks for that. And my last question is on the Bahamas. I know that the rationale for the diesel investment regarding improved efficiency, but Chris, you also mentioned CNG, which is advancing in terms of technology. And is there any concern about investing money on diesel, and then finding that CNG ends up being much more efficient or lower-cost? How do you protect yourself on making that investment in terms of agreement from the regulator government down there?

Okay. Well, so first of all, Matthew, that's a very good question, and we use the word diesel to mean the internal combustion engines, or the non-spark reciprocating engines that exist, and this particular group of engines is from Mann. Those engines are very efficient. I think something in the order of 8,300 BTUs per kilowatt hour. Those engines can burn light oil, effectively diesel. They can burn heavy oil. In fact, at this moment we are structuring those units to burn heavy oil. And they can burn gas.

So, there is no loss of investment if we end up burning gas in those units. They're a little bit less efficient, but at this moment CAD16 a million for oil, and we think under CAD10 a million for gas is going to make it okay to be a little bit less efficient. So, we are focused on getting gas into these units, and that brand-new plant will burn gas quite efficiently.

And if you were to say -- well, okay, maybe you'd think about a combined cycle, you'd still have a relatively small structured combined cycle, so you'd still probably be in the 8,000 BTUs per kilowatt range, and you'd have less flexibility as to what you can do with fuel. So, we think that, at this moment anyway, those diesels are still the right size and the right type of technology in order to be able to use a whole lot of different sources of hydrocarbons.

Thanks for that, Chris, that's helpful. That's all I've got.

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

Great. Thank you. Just a couple to start on NSPI, to make sure I'm understanding how you're set up for 2012. If I'm understanding you, Judy, you're basically CAD15 million at least pre-tax ahead of the game then, as you head into 2012?

Yes.

Okay. And I guess the second one -- I noticed you've got your pension contributions, which look like they're up about CAD20 million year-over-year. I suspect most of that's at NSPI. So, as long as that's cash out the door, but you've got the tax benefit there, so are you ahead on tax as well with the pension deduction?

Well, the pension costs are built into rates that we reset last year. So, we're beginning the year with the recovery of those costs, and then part of the rate planning in our business forecast included the tax deductions that come along with that. So, it's a package.

So, the increase year-over-year is already built into a lower tax number, for the 2012 rates?

I think we're always -- any time we're resetting rates, a net revenue requirement is where we are, so the net of all those moving parts actually ends up going to the number.

Okay. Just last question I had is on services. I'm wondering, Judy, can you break out, like if you ignore the 2011 Algonquin gains, and what you're expecting for 2012, what would you expect kind of base services, renewables, and Other to be the movement, 2012 over 2011?

We don't break it up too much more. So, what you're saying is -- if I take out my CAD12 million Algonquin gain from this year's number?

Yes.

I think it's pretty close to flat with 2010.

Two things, Robert. Number one, we don't break those out. And secondly, if you did break them out, they're about the same year-over-year. So it kind of washes out of the numbers from that perspective.

So, we'll have a little pick-up because we won't have our mark-to-market in Bayside in 2012, but we did have a very, very strong energy trading and marketing year. And as you know, we can't necessarily predict that from year-to-year, so circumstances will dictate whether or not we're able to realize on that again.

Okay. So bottom line is, Algonquin gains in or out, services is expected to be roughly flat year-over-year?

Yes.

Perfect. Thank you very much.

Thank you. (Operator Instructions) We have a question from Michael McGowan from BMO Capital Markets. Please go ahead, sir.

I have a question on the CAD14.8 million regulatory amount that you're carrying forward. Just what sort of tax rate would that attract, once you actually do bring it into income?

It's not a taxable event.

Okay. So, it would be the whole amount?

Yes.

Okay. Great. That's it from me.

Thank you. Our next question is from Linda Ezergailis from TD Securities. Please go ahead.

Just a clean-up question on your capital expenditure outlook. I believe previously we were guided to considering an Other CapEx category run rate of around CAD10 million to CAD100 million. I don't see that for 2012. Does that mean you won't be having any corporate capital expenditures, like no major IT projects or anything like that?

I don't know that we have that right in front of us. Do you know what the number --? So, I think we're actually projecting it to be between CAD100 million and CAD200 million this year, Linda.

Corporate level CapEx?

Well, Other. So, that doesn't mean corporate CapEx. That could mean other deals that we might do, et cetera, et cetera. So, we're just lumping anything else we might do that's going to attract a need for capital in there.

So, not necessarily allocated to anything yet?

Yes. So, unidentified at this moment, but in the momentum of the business, we would see those kinds of numbers showing up.

Okay. Great. Thank you.

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Huskilson. Please go ahead.

Thank you very much. Thank you all for participating in the call today, and as always, for your interest in Emera. So we hope you all have a great weekend. Thanks a lot.

Thank you. The conference call has now ended. Please disconnect your lines at this time, and we thank you for your participation.

Thank you, Audrey.

Thank you. Have a good day, sir.