Emera Inc (EMA) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Emera first quarter 2012 conference call. I would now like to turn the meeting over to Ms. Jill MacDonald, Manager of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us for our first quarter conference call this afternoon. Joining me in Halifax are Chris Huskilson, President and Chief Executive Officer of Emera; Scott Balfour, Executive Vice President and Chief Financial Officer of Emera; Rob Bennett, President and Chief Executive Officer of Nova Scotia Power; Gerry Chasse, President and Chief Operating Officer of Emera's Maine utilities; and Judy Steele, former Chief Financial Officer of Emera. Because Judy was Emera's Chief Financial Officer during the first quarter of 2012, she will be taking you through the financial results today. Emera's first quarter 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 will take a moment to remind you 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 this conference is being widely disseminated via live webcast. And now I'll turn things over to Chris.

Thank you, Jill, and good afternoon, everyone. First of all I'd like to welcome Scott Balfour, Emera's new Executive Vice President and Chief Financial Officer who joined us on April 16. Scott comes to us from Oakville, Ontario and brings a wealth of experience from his previous role as President and CFO of Aecon Group, who he was with for 17 years. We're really excited to have Scott join our team. Welcome to Emera, Scott.

Thank you, Chris. I am very excited to be taking on this role. Emera has built an impressive platform, has an exciting capital plan in front of it, and the energy sector itself, of course, is very dynamic with lots of opportunities for Emera to continue to prosper. So all in all, I think this is a great place to be and I have to say within my few short weeks of being here, it's very clear that I've joined a great management team with a very solid finance team. I'm still pleased to be here and I look forward to doing my bit to contribute to Emera's ongoing success.

Thanks, Scott. Now, turning to the results for the quarter. Net income for Q1 2012 was CAD80.2 million or CAD0.65 a share compared to CAD123.6 million or CAD1.06 per share for Q1 of 2011. Judy will take you through the details and an explanation of the changes in her review of the quarter. Now I will review our development progress. Beginning in Maine, the Maine Public Utilities Commission approved our 49% investment in First Wind's Northeast assets and an increased ownership in Algonquin. We will now proceed to close these transactions and we're working with Algonquin on subscription receipts for their Gamesa and Atmos transactions.

This quarter, we also made real progress on the engineering and design phase of the Maritime Links. We selected the preferred transmission routes and released the request for proposals to supply the subsea cables. The formal design and estimate will be ready later this year. The environmental assessment for the link is also advancing well and has been going hand in hand with the engineering. Recent changes in the federal environmental legislation are under review but are not expected to have any significant effect on our schedule.

This week, the Nova Scotia government tabled legislation regarding regulatory review of the Maritime Link Project. The legislation describes how the problems sees a regulatory process unfolding. The project will go before the Nova Scotia utility and review Board and the scope of that review will be mandated to regulation by the Nova Scotia cabinet. The legislation is consistent with the provincial government's past expressions of support and the legislation provides additional certainty about the regulatory process in Nova Scotia. For us this is very helpful. Finally, the definitive agreements for the project are progressing well, and now Fortis has recently begun the site works. The project remains on schedule and we're looking forward to seeing Muskrat Falls sanctioned this year.

In Nova Scotia we've been focused on bringing forward a rate stabilization plan for our customers which we filed with our regulator earlier this week. The application proposes an average rate increase for all customer classes of 3% in both 2013 and 2014 and is net of the fuel adjustment mechanism. The goal of this multi-year settlement is to provide customers with rate stability as we make the transition to reduce our dependency on fossil fuels and invest in more renewable generation. The application also proposes a two-year continuation of the fixed-cost recovery deferral account for a portion of the unrecovered fixed costs related to the paper mills. The deferral account is expected to be approximately CAD120 million at the end of 2014.

Recovery would begin in 2015 and be spread over eight years essentially replacing the Section 21 revenue requirement currently in rate. As well, the provincial government and federal governments have announced their intention to enter into an equivalency plan for GHGs creating stability for our carbon emissions out to 2030. Moving now to the Caribbean. In Grand Bahama construction is near completion of our 52-megawatt generation plant that will improve system reliability and the cost structure for electricity. We expect to see this facility online by June of this year. Looking forward, our compound annual growth target of 4% to 6% on average over the medium to longer term remains intact; however the unusually mild winter and the timing of increasing our investment in Algonquin and closing the First Wind transactions have made it more challenging to achieve that growth rate in 2012, but we will be working hard to do so.

Before I turn it over to Judy I want to take a moment to thank her for the role that she's played as CFO over the last 12 months. Judy's experience and expertise were instrumental in guiding Emera through this interim period. She's providing strong support to Scott as he settles into his new role and she will remain a key member of my team. Judy, it has truly been a pleasure to work with you as CFO. I look forward to working together for a long time to come as you take on new executive responsibility. With that said, Judy, I'll turn things over to you as you do a more detailed update of our financial results for the quarter.

Thank you, Chris, and good afternoon, everyone. Our first quarter results were released earlier today and are on the Emera website. As Chris mentioned earlier, Emera's consolidated net income for Q1 2012 was CAD80.2 million or CAD0.65 per share compared to CAD123.6 million or CAD1.06 per share in Q1 2011. Last year's amount was inflated by the CAD28.2 million accounting gain on our Caribbean acquisition. Removing that to facilitate an apples-to-apples comparison gives us CAD0.81 in 2011 versus our CAD0.65 this year, a CAD0.16 differential.

The timing of gains on Algonquin subscription receipts accounts for CAD0.11 of that. You will remember we recorded CAD12.8 million of these gains in Q1 2011, and while we expect additional amounts to be realized in 2012, the transaction triggers are occurring post-Q1. The last CAD0.05 is driven by lower earnings in our Nova Scotia and Maine utilities year-over-year, reflecting an unusually mild winter. Nova Scotia Power contributed CAD59.6 million to consolidated net income in Q1 2012 compared to CAD63.6 million in Q1 2011. As I mentioned earlier, unusually mild weather is the real story here reducing residential and commercial sales volume and resulting in a CAD3 million decrease in net income.

Industrial sales were also lower due to challenges facing the pulp and paper industry in the province of Nova Scotia but the earnings impact was mitigated by a regulatory deferral that allows any shortfall and contribution to our non-fuel expenses to be deferred for future recovery. Maine Utility Operations contributed CAD8.5 million to consolidated net income in Q1 2012 compared to CAD9.4 million for the same period in 2011. Maine experienced the same unusually mild winter that we did here in Nova Scotia and that's the primary reason for lower earnings from that segment. Caribbean Utility Operations contributed CAD3.9 million to consolidated net income in Q1 2012 compared to CAD29.6 million in Q1 2011. Once you normalize for that CAD28 million accounting gain I noted earlier, earnings are actually higher quarter-over-quarter. This primarily reflects our increased investment in light and power holdings.

Pipeline's net income contribution was consistent in both years at CAD6.8 million. Finally, I hope you notice that our services, renewables, and other investments section in the MD&A has a new look. We've changed the format to coincide with the presentation of our other segments. We believe it provides better insight into the businesses discussed in this section. This segment contributed CAD6 million to consolidated net income in Q1 2012 compared to CAD20.6 million in Q1 2011. The decrease is primarily due to the gain we realized on those Algonquin subscription receipts in Q1 2011 as previously noted. That's all for my financial review and now we would be happy to take your questions.

(Operator Instructions)

Juan Plessis, Canaccord Genuity.

Thank you. Chris, just a clarification first. You mentioned in your remarks that you may be challenged to meet your 4% to 6% EPS growth in 2012. Are you including in that 4% to 6% number any assumptions for gains arising from the conversion of the Algonquin subscription receipts?

Well Juan, thank you for that question. I would say at this point we are not counting on that happening and so until we can see that actually come to fruition, then that's part of the challenge. But, I think it's important to note that first of all, we are still committed to the 4% to 6% growth on an annualized basis and we see that as an average over the period. As well, it's also important to note that this growth is a bit lumpy and certainly when transactions slow down as they have in the early part of this year, it's not helpful but we don't count on anything until it happens, as you can understand, but when it does happen, then it's a good thing.

Okay, great, thank you for that and can you provide us with an update on any progress made on the Northeast Energy Link?

Yes, I would say that we're still in a mode where we're awaiting the results of the application we've made before the FERC and maybe I would just ask Gerry to take this one to start.

Thank you, Chris. Yes, Juan, we're waiting for that decision from FERC and deliberations are currently scheduled for that decision on May 17 so we do expect something to come out of that fairly soon.

Okay, thank you very much.

Thank you, Juan.

Linda Ezergailis, TD Securities.

Thank you. Just have a question with respect to the NSPI rate stabilization plan. Can you comment on the input that you had from various stakeholders to produce that and what some of the pushback if any has been from various stakeholders and when you would expect that to be finalized in terms of URB approval?

Linda, it's Rob here. This rate stabilization plan builds on a proposal that we made last year during the rate setting process which involved all stakeholders in the communication of a multi-year plan over three years at that point, and the feedback that we've received then was that maybe a shorter time period would be more appropriate and we've built that into this proposal which we think is a very balanced approach to rates. As far as the regulatory process goes, the hearing for this particular case won't happen until the Fall, September we expect, and all of the discovery and question and answering will happen over the Summer period.

Thank you, and just a follow-up question. The federal loan guarantee discussions, any progress on that?

Well, Linda, it's Chris. They're ongoing and I think the most important thing was to make sure that we had the data room populated. We have the data room populated now and so that's going to allow that discussion to continue and we're hopeful that that can come to fruition over the next short while.

Great, thank you.

Ben [Fram], BMO Capital Markets.

Okay, thanks very much. I just wanted to go back to Northeast Energy Link and just wondering broadly what the timing looks like in terms of bringing in a project like that these days.

Gerry, maybe I'll take the first part of it. Well, first of all we would see that that project will likely come in behind the Nalcor project. It is sort of a long process to get a project that's that complex to come together. We would see something in the timeframe just beyond Nalcor as being quite appropriate. And in fact the other thing about that is if that project comes on after Nalcor energy is in the market that's very helpful when it comes to ensuring there's lots of clean energy to feed that market.

Okay, and there's been a bit of a controversy around the ROEs in New England on transmission in particular and just wondering, does that affect your spending plan in that area right now? I think you got CAD100 million or so in Maine on transmission and how do you look at that in terms of the Northeast Energy Link?

Gerry, do you want to start?

Sure. There has been a compliant filed by Massachusetts and other states, basically stating that the ROEs in New England are higher than what's just and reasonable. Commissioners at the FERC have moved that to, or remanded that to a judge to hear that case, and I do understand that utilities in New England are meeting with a settlement judge in the next week for settlement discussions. That's basically the update on the status of that. I don't know that it has any significant implications on our investments in transmission going forward though.

Okay, great.

Ben, I might just add to that. Fundamentally, we think that the FERC is a very good regulator that they will set returns that are appropriate to attract capital into that market and we firmly believe that that will be the case and therefore that would not slowdown our projects at this stage.

Okay, thanks a lot.

Robert Kwan, RBC Capital Markets.

Great. Good afternoon. Chris, if I can just come back to the guidance and I know you probably don't want to get too granular but just coming off that CAD1.77 base for 2011, can you just confirm and be -- directionally are you thinking you're just going to fall a little bit short of that 4% to 6% range or are you directionally potentially guiding below the CAD1.77?

Well, I think Robert, it depends on where you start but certainly, if you're starting with a number that's in that range, then we certainly see improvements year-over-year so that would be how we would see it today and as we look at the consensus today we don't see that being too far out of whack.

Okay, and within the guidance, can you just talk about what some of the funding assumptions are when it comes to specifically common equity but as well on the preferred side?

Yes, well I think we've been pretty clear with the market that we see this as continuing to balance out our approach to our balance sheet. We see it as being roughly 60/40 from a debt and equity perspective. We factor preferreds in there on a 50/50 basis and so right now we're a little bit heavy on the debt side. We certainly do need to get probably some [praps] and some common equity in there over the next little while. But when we think about our balance sheet, we think about it on a rolling 18-month basis, not on a 12-month basis. And so over that period you're going to see us in all those markets and Judy anything to add to that?

No that pretty much sums it up.

I guess just following on the funding when it comes to the rating agency decisions can you just talk about kind of your feelings on what happened there, the discussions you might have had with where you saw the funding plan and then the last part with respect to their concerns around recoveries for capital projects, anything that you're working with the regulator to try to shore that up?

Well, so we're conscious and always interested in what the rating agencies have to say. We can appreciate their remarks and their point of view with respect to additional clarity and certainty on the recovery of basically mandated investments in renewable generation. So we'll be working with them over the next several months to increase their comfort level there where possible. I will say that there's never really been an unrecovered investment within Nova Scotia Power in its history and our regulator is on the record as saying that to the extent investments are approved or deferrals are approved that they are recovered from rate payers. So we come into it with that history. But that said too, we want to be conscience of our own debt equity ratios and making sure that we're at limits that where we're comfortable and where our rating agencies are comfortable, so all that will come together I guess over the next several months and we'll see where we are at that point.

And Robert, just to chime in here for a minute. First of all I think the rating agencies are looking at a little bit of uncertainty at this moment. Well the project is in a very, very early stage and so it's not really all that surprising that there's a bit of uncertainty. I think what the provincial government has just done in the past week relative to legislation I think is helpful. I think the way that the regulator here in Nova Scotia is looking at this project, I think is also helpful.

And the other thing that you can't put to one side is when this project has a federal loan guarantee, and again that is not in the certainty basket at this moment because we have to get that work done. But when that is the case, then that's also going to make the project look quite different, so I think it's just we're at early stage. If you remember the rating agencies confirmed our ratings and they said but, there's a lot going on here, we need to watch this carefully and we don't take issue with that. So we are working our way through it and once we get some more certainty on the table then I think that will help everyone.

Okay, that's great. Thanks, Chris. Thanks, Judy.

Thank you.

Matthew Akman, Scotiabank.

Hi, Chris. At the risk of over-irritating you at this point I want to come back to the guidance. So just to be clear about the guidance you guys have for this year is based on some expectation of some Algonquin gains and also in your benchmark of the 4% to 6% growth rate coming off last year, you do include the Algonquin gains in those numbers, right?

Yes, that's correct, Matthew. That's the way we look at it.

Okay, thank you for that. Moving to I guess more fundamental issues, on Nova Scotia Power maybe you could just talk a little bit about what is the upward pressure on rates? I guess is it rate-based growth basically because your fuel costs look like they're coming down. I presume that the ROE or you're embedding in your proposed settlement is consistent with this year, probably not down or up. So is that what it is, is just basically rate-based growth from the renewable that's pressuring rates right now?

No, there's a mix of items. Taxes as the tax shield that we've realized in the past few years related to the renewable buildout program, as that rolls off, we're seeing an increase there. The fuel that you mentioned is down because we have lower industrial activity in the province because of the paper mill closures, but that's not having an impact directly on the business because of the fixed-cost deferral arrangement that we're working under right now.

I see, okay and is the ROE that you're proposing to earn in the settlement consistent with what you settled on for 2012?

That's correct. No change in ROE.

Okay, thanks. Moving away and just my last question is on utility services which is part of the services, renewables, and other segment which did pretty well in the quarter. And it was attributed to activity in the Caribbean and Newfoundland. I'm just wondering what kind of activity in Newfoundland generally and how are you feeling about doing work for I guess those must be for affiliates in the Caribbean?

Yes, at this stage, that's correct, Matthew. So first of all in the Caribbean what's going on is that EUS is in fact building the power plant down there and they're also going to be operating the power plant. One of the things that we're working to do in the workout plan we have for Grand Bahama is just make sure that we put assets in place and then we protect those assets to the point that we know what the maintenance practices are, we know what the operating practices are, and we get it off on the right foot. So we're actually using EUS to do that on behalf of Grand Bahama, probably for the next two or three years and then we would expect to hand that facility back to the utility once we've got it working much better, so that's on the one hand, that's providing some value.

The second thing is we invested in a company called Green's in Newfoundland that allowed us to begin to do some business for the utilities in that market and so that would include Newfoundland Power, Newfoundland Hydro, and also Bell Aliant over there. And so we are actually doing some work in each one of those categories, and as well, it's letting us get our feet on the ground both on the island of Newfoundland and also in Labrador. And as a result of being able to do business there we see some opportunities to do some work around the project as the project comes together. So right now, there's actually a significant amount of activity happening in Labrador as they start to buildout some of the mining sites that they have and so we're in the process of bidding on some projects in that circumstance as well. So we see EUS as being a critical piece of our business to ensure that we can actually work up and down the value chain.

Okay, thanks, good to see your relationship with Fortis is improving as well. Those are my questions.

Okay, well thank you for that, Matthew.

(Operator Instructions)

Paul Lechem, CIBC.

Thank you, good afternoon. Just in your outlook section you mentioned CAD110 million to be spent this year in the Maritime Link and Labrador-owned transmission link projects this year. Just wondering given the latest delay in the project with what's going to a vote in Newfoundland later this year is that CAD110 million still on the table or are you going to defer some of that spending or what are your thoughts about the pace of spending on this project?

Well thanks for the question, Paul. First of all, I think it really depends just on the timing of the sanction for the Labrador Island Link, so the bigger number actually depends on us investing in that facility as well and so the only real -- I think the biggest question there is how the whole environmental approval will unfold for that line but that will be the determining factor on whether or not we get to those numbers. Otherwise, the smaller amounts are amounts necessary to keep both the engineering and the procurement and the environmental activity going on the Maritime Link itself and at this point we see those as being pretty firm but the unknown at this point is the environmental approval for the Labrador Island section.

Okay, thanks, and just on the project itself, can you give us any idea of what is going to be needed to, if anything, to move the process forward in Newfoundland to sort of -- the service that is needed to provide the financial support for the project that the parties seem to be looking for, what do you think are the main stumbling blocks to get it going forward from here?

Well, I think the Premier of Newfoundland has laid out the approach that she's taking in order to move to an approval and a sanction of the project and so I think that's the primary process that is going on. Newfoundland is working their way through their internal process and we would expect that there will be a debate in the legislature in, I think they've said in early Fall, and I think that's going to be the point at which we'll know when the project is sanctioned. And I think the other side of it is we're continuing to advance all of the different parts of the project including the environmental approvals that are necessary. And I guess I wouldn't minimize the activity that's going on with the federal government around the loan guarantee. That's another very important piece of what's happening here and we're quite optimistic that that will come together in that same kind of timeframe.

Okay, and are you closer to reaching a definitive agreement with Nalcor at this point?

We're very close. Things are moving along and we're pleased with the progress at this stage.

Okay, but no timeframe for that?

No. We actually said back in January we said it's just not productive to put specific dates on these things. There's a lot of work going on, there's a lot of collaborative activity going on between the two companies. We're very pleased with that, as you can tell from the resource and the effort we're putting into the project. We're not slowing down a bit and that should give you a good indication of how positive we feel about the project.

Can you give us some sense of why there isn't a definitive agreement in place? What are the negotiating points at this juncture? Are you waiting for any regulatory approvals to sign the papers or are there other things you can point to?

No, I think Nalcor and ourselves have been quite consistent on this point. It's just the effort necessary to get all of the work done to make sure that we have the definitive agreements in shape. We started out with a 30-some-odd page term sheet/ That's turned into thousands of pages of definitive agreements and we're all cautious people. We want to make sure that we get it right, but we're working collaboratively together on the project as we have been all along.

Okay, thanks very much.

Thanks, Paul.

Thank you. There are no further questions at this time. I would like to turn the meeting back over to Mr. Huskilson.

Okay, well thank you very much, folks, for taking the time today and participating in the call and thank you for your interest in Emera. I hope everyone on the call has a great weekend.

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