Emera Inc (EMA) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Emera fourth quarter conference call. I would now like to turn the meeting over to Ms. Jill MacDonald, Manager of Investor Relations. Please go ahead, Ms. 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; Scott Balfour, EVP and Chief Financial Officer; Rob Bennett, Chief Operating Officer; Nancy Tower CEO of Emera Newfoundland; Bob Hanf, President and CEO of Nova Scotia Power; Gerry Chasse, President and Chief Operating Officer of Emera's Maine Utilities; and Sarah MacDonald, President of Emera Caribbean. Emera's fourth quarter and year-end earnings release was distributed today via news wire, and the financial statements and Management Discussion and Analysis are available on our website at Emera.com.

This afternoon, Chris will begin with a corporate update, and then Scott 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 and Caribbean Utilities, 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 that this conference is being widely disseminated via live webcast. And now, I will turn things over to Chris.

Thank you, Jill, and good afternoon, everyone. Consolidated net income for 2012 was CAD220.8 million or CAD1.77 per share, compared to CAD241.1 million or CAD1.99 per share in 2011. When normalized for one-time accounting gains and mark-to-market adjustments, we delivered 3.9% growth in earnings per share year-over-year. Scott will take you through the details of the quarter and the year end later in his remarks. 2012 was a year of achievement, and I want to take a moment to review some of the highlights with you.

This year, we made considerable progress on our Maritime Link project, accomplishing what we set out to do and more. To recap, we finalized the commercial agreements, finalized the terms of the federal loan guarantee, jointly announced the sanctioning of the Maritime Link under the sanction agreement, sanctioned the Muskrat Falls and Labrador Island Link project with Nalcor, filed the environmental assessments, and most recently filed the regulatory application with the Utility and Review Board. Regulatory oversight continues to remain an integral part of our overall process for the project, and ultimately Nova Scotians through the regulatory process will decide on project's approval. The UARB hearing is scheduled to begin on May 27, and we expect a regulatory decision by the end of July in 2013.

As for our next step, the environmental assessment process continues and we expect to have that decision by mid-year. We are advancing the external financing process in cooperation with the government of Canada. We expect to have financing in place by the end of 2013. Engineering and design work is progressing as we advance towards construction-ready cost estimates in the fall of this year. Procurement activity is ongoing, as we go to market for major components for the Maritime Link facilities, including the request for proposals for the subsea cable and the converter stations. All of these regulatory milestones and related project facility activities will be culminated in a decision to proceed with construction later this year.

Our investment in the Labrador Island Link is progressing well. Our total equity investment is estimated to be approximately CAD400 million. The Labrador Island Link will be a regulated investment in Newfoundland and Labrador, and we expect to generate an ROE equal to Newfoundland Power. In Nova Scotia, the UARB approved the settlement agreement between Nova Scotia Power and customer representatives on 2013 and 2014 electricity rates. We believe this settlement strikes a fair balance between keeping rate increases as low as possible for customers, while ensuring cost recovery for the utility.

I am pleased to report that in 2012, 19% of Nova Scotia's electricity was generated from renewable sources including wind, hydro, and biomass. This is the highest total ever, and meets our 2013 requirements of 18.5% out one year early. We expect to go even higher this year, once our 60-megawatt biomass generation facility comes online. And don't forget that more than 85% of new homes choose electricity for home heat. And therefore, when customers have a choice in energy sources, they are choosing electricity.

Moving to the Services business, Emera Energy welcomed First Wind into the family in 2012. This investment provides us with a meaningful foothold in highly contracted operating wind assets in one of our most key markets. By having a large presence in the Northeast US, we see many opportunities through development and utility services. We continue to be pleased with our investment in Algonquin Power. During the quarter, we exercised 4.9 million subscription receipts in connection with the previously announced sale to Algonquin of our 49% interest in CalPeco. This transaction brought our ownership interest in Algonquin up to 18.8% as of December 31, and we realized an after-tax gain of CAD8.4 million in the quarter on this transaction.

The Maine Public Utilities Commission recently approved Emera owning up to 25% of Algonquin, subject to a cash cost of our investment in Algonquin not exceeding 5% of Emera's asset base. Our Maine utilities had a solid year. In the fourth quarter, we energized the Downeast Reliability Project, a [CAD61] million project that will bring reliability benefits to our customers in Eastern Maine and capacity for future development of renewables. Looking forward, a focus in Maine is on increasing the use of electricity for home heating. The Maine market is currently dominated by oil, and there is a real opportunity for us to increase our market share and drive investment and growth into our distribution businesses.

While direct access to natural gas will remain out of reach for most Mainers, customers can acquire all benefits and more by using electricity with efficient electric heating technologies. Our Heat Pump Pilot Program, for example, has been very successful, and we are currently developing a permanent program with both state and federal stakeholders. The Northeast Energy Link continues to progress, and this quarter the interagency review panel accepted the Northeast Energy Link's filing as an expression of interest. In its verbal comment, the panel cited that the project was likely to comply with all seven of the criteria set forth in the statute governing state corridors. The Northeast Energy Link will begin the certificate process with the panel in Q1 of 2013.

In the Caribbean, things are progressing. In Grand Bahama, we executed year two of our three-year turnaround plan. Outages are down significantly, and we have completed construction of our 52-megawatt generation plant that has already improved system reliability and the cost structure for electricity. Importantly, the restructured rate plan that was effective July 1 was formally signed in January with the Grand Bahama Port Authority. This plan will allow for the recovery in the investment in the new plant at lower overall all-in cost for customers.

A strategic initiative for the Caribbean Utilities is the evaluation of alternative fuels to reduce Island dependence on oil. We now see CNG as a potential solution. Securing lower cost fuel sources can 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 of the island significantly. With that, I will turn things over to Scott, who will give you a detailed update on our financial results for the quarter and the year. Scott?

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 income in 2012 was CAD220.8 million or CAD1.78 per share, compared to CAD241.1 million or CAD1.99 per share in 2011. When current year results are normalized for CAD9.7 million of mark-to-market losses, 2012 net income was CAD230.5 million or CAD1.85 per share. 2011 results included a CAD28.2 million accounting gain on our acquisition of Light & Power Holdings and a CAD3 million mark-to-market adjustment. When normalized for these items, 2011 net income was CAD215.9 million or CAD1.78 per share, representing 6.8% growth in net income, and 3.9% growth in earnings per share year-over-year.

This increase in net income is due to modestly higher earnings in our Caribbean and Nova Scotia utilities, and due to CAD22.7 million of after-tax gains realized on Algonquin subscription receipts. In 2011, those gains totaled CAD12.8 million. When normalizing our 2012 results, you may have noticed that Emera Energy had a larger than normal mark-to-market loss of CAD15.9 million in the quarter. This increased mark-to-market loss includes the impact of refinement to our valuation methodology for certain multi-year natural gas purchase contracts, as well as from the addition of our share of Northeast Wind partners mark-to-market impacts. The underlying economics of the transactions remain attractive and are unaffected by these mark-to-market impacts.

With that, Nova Scotia Power contributed CAD126 million to consolidated net income in 2012, compared to CAD123.5 million in 2011. The increase is primarily driven by continued investment in cleaner energy sources, and in continued investment in system reliability. Notably, Nova Scotia Power made a one-time contribution of CAD90 million to its pension plan. This will reduce near-term future pension costs, help to build back the plan funds as markets improve, and will create a one-time tax savings of CAD31 million, which will benefit Nova Scotia Power and its customers.

However, this voluntary payment did reduce Emera's cash flows from operations. In 2012, operating cash flows were CAD397 million, down 0.5% from CAD399.5 million in 2011, but these results do include that CAD90 million pension contribution. Maine utility operations contributed [$35.4] million, to consolidated net income in 2012, compared to [$37] million for the same period in 2011. Decreased net income is primarily a result of lower capitalized construction overhead due to lower capital spending in 2012, largely caused by some project delays that are now expected to commence in 2013, and higher operating, maintenance, and general expenses. In 2013, the Maine utilities expect to be back on track with expected growth in the 4% to 6% range over 2011 levels.

Excluding the impact of accounting gains previously noted, Caribbean utility operations contributed [$23.2] million to consolidated net income in 2012, compared to [$18.6] million in 2011. The increase in net income is due to Grand Bahama Power Company's rate structure changes, and an increased investment in LPH as of January 25, 2011. In addition, there was a [CAD4.6] million gain in the fourth quarter related to the transfer of stranded costs in GBPC.

Our pipeline's operations contributed CAD27.9 million to consolidated net income in both 2012 and 2011. Services, renewables and other investments contributed CAD33.7 million to consolidated net income in 2012, compared to CAD26.4 million in 2011. Excluding the effect of mark-to-market adjustments, this segment contributed CAD43.4 million in 2012, compared to CAD29.4 million in 2011. The increase is primarily due to gains realized on Algonquin subscription receipts as previously noted. That is all for my financial overview. And we will now be happy to take your questions.

(Operator Instructions)

The first question is from Juan Plessis of Canaccord Genuity. Please go ahead.

Thanks very much. There is mention in the outlook section of your MD&A of two complaints before the FERC that are looking to lower the allowed ROE at Bangor Hydro's Transmission. Can you give us a bit of color on what is going on there?

Sure, Juan. This is Gerry from Bangor Hydro, from the Maine utilities. So, we have had a couple of complaints filed at the FERC against all the New England transmission-owning utilities. But it is early on in the case at this point, and the parties have just recently filed their evidence. So, we don't have much of a view on where that is headed. But I would say that, I think we have clearly demonstrated in the evidence that we have filed that our current ROE remains within the zone of reasonableness as allowed by FERC. So, as I said, it is still a little early in the case to, to have a view on that.

Okay. Thanks very much for that. There was an unplanned outage at Bear Swamp in the quarter. Can you tell us how long the facility was out for, and how much that cost?

Juan, it is Chris. I don't think we have those right at our fingertips. That is something we can probably dig out.

Okay. I will move on to the final question here. I am just wondering if it is possible to break out the mark-to-market gains and losses between Bear Swamp, Northeast Wind, and the trading and marketing activities.

Yes, Juan, it is Scott. If you could give me a second, I can help you a little bit with that. Thank you. So Bear Swamp impacts for the year were -- just want to make sure that I am looking at the right data here for a second. Yes, so were modestly positive. First Wind was approximately CAD3 million negative. Trading impacts were about nearly CAD7 million negative, and the impact of the refinement to the methodology around some of the longer-term contracts was about a CAD3.8 million impact, all after-tax numbers.

Okay, thank you very much.

Thanks, Juan.

Thank you. The following question is from Paul Lechem of CIBC. Please go ahead.

Thank you. Good afternoon.

Hi, Paul.

On the capital spending, you mentioned in Maine, there was some delays in projects there. And also looks like in NSPI the amount spent in 2012 was a little below your original expectation. So can you maybe go through what those might have been, what the issues might have been, and why you think you can be back on track in 2013?

Sure. This is Gerry. I can start with Maine. As we mentioned in the past, with many of these capital projects, their spending is somewhat lumpy anyways. But we did have one particularly large transmission project that was delayed, and it is really more of a timing matter than anything. It was primarily delayed as a result of longer regulatory approval with the Northeast, Northeast Wind approval at the Maine Public Utilities Commission. There was a little bit of a link between the two projects there. So it is really just a timing issue that pushes it out into 2013.

So now that the Northeast Wind is approved, that -- the project can now proceed, is that --?

The project is now proceeding, yes.

Okay. Fair enough. And at NSPI also, it looks a little below original expectations. Anything we should take away from that?

No, it is Rob Bennett here. It is really just issues of timing and the start time of projects, and how much we were able to get done in that calendar year. And so those projects have started now carry over into 2013.

Fair enough. And looking at the 2013 forecast for transmission investments, [CAD317] million, it looks like, related to Lower Churchill, is -- should we take away -- because the Maritime Link, you are saying you expect to spend CAD97 million. Is the rest your investment in the Labrador-Island link, or how should I think about this?

Yes, investment in Labrador-Island Link, in fact, will start imminently. We are waiting upon our first cash call from our partner, Nalcor, that expect, in fact, at some point next week. That first cash call will be order of magnitude in the range of CAD60 million, CAD65 million, CAD70 million, something like that. And then we will receive cash calls from them in relation to our share of the required equity investment in that project over the three years that follow. The timing of that isn't yet perfectly predictable to us, but you can sort of work backwards from the COD date in early 2017, completion in 2016. And sort of work some of that math backwards to allocate the balance of those funds over that period.

Got you. And then finally, if you are able to spend the CAD800 million-odd you are hoping to spend on CapEx this year, do you foresee having to, to use additional equity to fund that, or how do you anticipate funding that amount?

Yes. We will just -- Paul, we will continue to balance our capital structure towards our objective of balance between equity press and debt, roughly that 35%, 10%, 55% kind of structure. And so, we will continue to manage our balance sheet towards that target capital structure. And so, yes, as we carry through these, through these capital spending programs over 2013 and in years to come, there will be a need for us to continue to access the capital markets. And as I say, we will just balance against that target capital structure. So you can look at our quarterly results, and see where our balance sheet sits against that, and come to your own view of what that might mean in terms of where we will access capital market capital next.

Okay. Fair enough. Thank you.

Thanks, Paul.

Thank you. The following question is from Linda Ezergailis from TD Securities. Please go ahead.

Great. Thank you. With respect to your pension contributions for 2013, I think in one of the notes says you will -- the required amount is between, let's call it CAD45 million to CAD60 million. But I am just wondering if you plan to make a voluntary contribution again in 2013? Or is that a decision that is made at the end of the year?

It's, it's not something of, of -- certainly in the case of Nova Scotia Power, and the Canadian pension plans, it is not something that's on our radar right now that we are expecting to do.

Okay. That's helpful. And then while we are in Nova Scotia, it is helpful to know what the capital plan is CAD337 million this year. But there is mention of potentially some focused reductions or deferrals. What might the range of capital be in Nova Scotia Power? I realize it is really early in the year, but just to give us a sense of book ends potentially?

I would say at this point, we are still finalizing our plans in relation to, to working through that. And obviously, we are working hard in order to manage the impact that additional capital investment can have on rates for customers. And so with that focus, we are continuing to not only focus on being as efficient as we can with our capital. But also continuing to be efficient as we can running and managing the business. And as those plans develop through 2013, what we were trying to telegraph is that the capital spending profile that was disclosed within the MD&A may turn out to be less. But it is too soon at this point to say exactly what number we will end at.

Okay, thank you. And just a quick question on the proposed merger between Bangor and Maine Public Service Company. I am wondering if it is perceived as being contentious at all locally? And is it being contemplated that all benefits and cost savings flow directly to customers, or might there be some cost savings for Emera at this point?

Yes, Linda, this is Gerry from Bangor Maine Public. The case currently is not contentious at all. We expect relatively smooth proceeding that will, that will end somewhere around the third quarter of this year. And as with all rates, savings would ultimately flow back through to customers.

But maybe not immediately?

Well, not -- certainly not immediately -- flow back through to customers once we, once the utilities went back in for distribution rate cases.

Okay, great. Thank you.

Yes, Linda, I think fair to say, that Gerry and the team have already been able to save costs in Maine Public. And in fact, the Maine Public would have headed to the regulator for I think close to 10% rate increase had they not merged -- had they not gone into the transaction, the merger in the first place. And so, we believe that there is opportunity for those kinds of benefits to continue for customers.

I am also, just since I have the air, I will talk about what the questions Juan had asked earlier on Bear Swamp. And so, we actually had a generator failure on that unit, and it lasted from July, and it is expected back February 27. So I guess that is pretty precise. And it was -- it will be about a CAD1 million after insurance. So that's the, that is the detail on that, Juan.

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

Good afternoon. Actually, if I could just follow up then on that Bear Swamp information. Have you been accruing then, the insurance, the expected insurance proceeds along the way, or are we going to see bigger inflow booked into earnings?

So, so I'm not certain, but I believe the answer is no.

So, no, you haven't been accruing?

That's correct.

So we have been seeing the negative impact of it being out, and then we will see something flow in the future?

Correct. Without me having confirmed that, but that is what I believe is the treatment.

Okay. Just a question, so there is -- with the approval of the Algonquin ownership increase, you mentioned there is a Court of Appeals outstanding. Is that by the parties that were opposing it to begin with, or just -- can you give us some extra color on that?

Gerry, do you want to take that, or do you want us to go ahead?

There were a few parties in the case that were originally opposing that. And that has gone to the state of Maine Supreme Court, or I believe it may be called the Superior Court. And we are expecting to get a decision on that in the next few months.

And really, what the, what they have -- I think the argument they have with the regulatory decision is that they feel that the regulator overstepped some of its bounds on some of the restrictions that they put on the Company. And so that is the argument. We, we don't agree with that, and nor does the regulator themselves. And so we are actually pretty confident and have been working down that path.

Okay. Scott, you had obviously, mentioned that right now spending, especially as it relates to the Labrador-Island Link is going to be moving around a bit. Do you have the rough profile between that and the Maritime Link, when you expect the spending there over the next few years? On a per-year basis?

I think we have put forward the profile for the whole thing. I am not sure we have broken it out at this point, Robert. That's something we can maybe take a look at for the future.

Sure. Okay. Just the last question. You have got on page 72, the NSPI rate base of CAD3.7 billion end of year. And that looks a little bit higher than the 2013 rate filing that actually had a midyear '13 rate base. I am just wondering what was driving that, and is that CAD3.7 billion number really what we should be looking at with respect to NSPI earning?

It is Rob here. We are just reflecting on that for a moment, to make sure that our numbers -- that we understand the numbers.

Robert, we will just take a look at that. Did you have another question?

Nope, that's it.

Yes, I don't think -- I think the question is a bit of a surprise to us. I think we expected that the rate base is exactly where we had thought it would be. And --

But we should confirm it. So there shouldn't -- the rate base number that is listed, it should be the right number.

Okay. That's great. Thank you.

It's -- the pension contribution of CAD90 million would be a component.

Would be the only other issue, I think, Robert.

And that wasn't contemplated as part of the 2013 rate filing?

That's correct.

Okay. Well, that is probably -- that looks like it is probably the vast majority of the variance then. Okay. Thank you.

All right. Okay. Well, that's great.

(Operator Instructions)

The following question is from Ben Pham of BMO Capital Markets. Please go ahead.

Hi, thanks, and good afternoon. I wanted to circle back to Maine. And it is just because earnings were a little soft this year. And I know there is some timing issues there, but just on the OpEx side, the expense side, it was up quite a bit year-over-year. I mean, is that a timing issue as well, or is that more a structural shift upwards?

Yes, Ben, this is Gerry from Maine. No, I wouldn't say it was a timing issue so much as, we had two primary variances in our operating expenses. One, being driven by lower interest rates, having an impact on the discount rate and our pension expense, which resulted in about a CAD1 million dollars variance. And the other one, the fact that we are self-insured, and we had higher than historical experience medical claims of that -- last year, which also resulted in about a CAD1 million dollar variance.

Okay. Thanks for that. And just on a broader level, a high level question. And I am just wondering about how you think about the balance of your business in the future, longer-term between regulated assets and nonregulated. And I think you are about at 80% today, and with Lower Churchill, it is probably going to move up from there. Just curious, because when you look allowed returns in North America, they seem to be trending down over time. And there is obviously pressure on the regulators to contain costs going forward. So just curious, how do you look at that, in terms of your business risk mix going forward in the future?

Well, I -- as you point out, a lot of the projects we have on the go are still regulated projects. We think though, that they are quite competitive when it comes to attracting capital, and obviously, we still like those businesses. And if you look at the business in, that we are doing with Nalcor in Newfoundland and on the Maritime Link again, very traditional, traditionally-based, very similar to the rest of our Business. And then some of the rest of what we are doing is -- we obviously, have a large project that's focused in New England Transmission. So when you think about that, we are going to continue to be pretty regulated. And at the end of the day, I think what is important to us is that we can attract the capital, and that we have reasonable spreads to the, to our cost to raising the capital.

Okay, thank you. Then one last one on First Wind, with that being approved last year. And I am just looking to 2013, can you give us a sense of just any sort of significant progress there we can expect see this year? Or new developments that we should be looking forward to?

Well, you have to, you have to -- I believe that most that of our focus this year is going to really be on the Labrador and Newfoundland projects, because that is, that is certainly going to be substantial, substantial effort for the Company. We are still -- as I said in my remarks, we are certainly not going to give up on the transmission in New England. There is lots to be done there and there is good progress happening, especially around the Corridor work that is going on, and we are quite looking forward to finalizing that arrangement, as well.

And then lastly, kind of something that is just beginning for us is working on gas in the Caribbean, and we are hopeful that come early '14, we would see some gas moving into the Bahamas for sure. And so, that's the kind of -- that is probably a lion's share of the effort that we will be putting in this year.

So nothing really on our First Wind front then?

Well, so again, First Wind is continuing to move projects forward. I think we are just in the process of bringing one of those projects in, that was completed last year. And so I think, I think we are probably a little bit -- it will be in '14 I suspect before any of the next projects come in. But the First Wind is going to be quite focused on trying to meet the objectives in the State of Massachusetts.

Massachusetts has just moved their long-term contracting numbers from all-in 3% of demand -- or energy, up to 7% of energy. And so pretty soon, I think you are going to start seeing some calls for new projects. And First Wind has a number of projects in the pipeline that they would see happening. But it's likely, more likely that that would actually happen in '14.

Okay, great. That's very helpful. Thank you, everybody.

Thank you.

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

Okay. Well, thank you very much. Thank you all for calling in today, and your interest in Emera. It is pretty hard to ignore the blizzard that is affecting all the Northeast. So I guess in spite of that, we hope you all have a great weekend. So take care.

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