Emera Inc (EMA) 2013 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Emera first-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 first-quarter conference call this afternoon. Joining me from Emera are Chris Huskilson, President and Chief Executive Officer; Scott Balfour, EVP and Chief Financial Officer, and other members of the Management team. 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 www.Emera.com. This afternoon, Chris will begin with a corporate update, and 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 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'll turn things over to Chris.

Thank you Jill, and good afternoon everyone. We had a great start to 2013, delivering Q1 consolidated net income of CAD122.8 million or CAD0.93 a share compared to CAD80.2 million or CAD0.65 a share in Q1 of 2012. When normalized for mark to market adjustments, we delivered 33% growth in earnings per share year-over-year. The significant increase in the quarter is primarily due to strong results in our Emera Energy Services business and gains realized on the conversion of Algonquin subscription received to common shares. Scott will take you through these details later in his remarks. Beginning with our largest initiative, the Maritime Link Project continues to proceed on schedule. Regulatory oversight continues to remain an integral part of the overall project.

In March, we completed the information request portion of the regulatory process, where we were replied to more than 2,000 questions. Earlier this month, interveners filed 1,000 pages of evidence based on our responses to those questions. We believe the evidence continues to support the merit of the Maritime Link for Nova Scotians both as it relates to being the lowest cost long-term alternative to meet Nova Scotia's clean energy needs and as the unique and important strategic benefits it provides to Nova Scotia by putting Nova Scotia in the middle of an energy market rather than being at the end of the line as we are today. Nova Scotians and the regulator will ultimately decide upon the relative merits of the Maritime Link, and we remain confident this project will win their support.

The UARB hearing is scheduled to begin later this month, and we expect a regulatory decision by the end of July. The environmental assessment process is near complete, and we expect to have that regulatory decision later this quarter. Engineering and design work is progressing as we advance towards final construction ready cost estimates in the fall. We continue to work towards the commencement of construction in 2014 with first power achieved in 2017. This quarter, Moody's assigned a provisional AAA backed issuer rating to Nalcor's Muskrat Falls, Labrador Transmission, and Labrador-Island Link. This confirms the benefit of the federal loan guarantee in that it provides very important financing cost reductions to these projects and similarly to the Maritime Link, for which we had secured the same government of Canada support.

Notably, while the review and approval process continues here in Nova Scotia for the Maritime Link project, our partner Nalcor is now underway with construction of their projects. The equipment is on site, contractors have been engaged, and the subsea cable has been ordered. And as such, we made our first investment in the Labrador-Island Link in the quarter. The first CAD67 million of a near CAD400 million investment for Emera, the Labrador-Island Link will be a regulated investment in Newfoundland and will earn a return on equity equal to that of regulated utilities in Newfoundland.

As I mentioned earlier, our marketing business had a very strong quarter. Emera Energy has been active in the US Northeast physical natural gas markets for several years and understands the regional pipeline infrastructure very well. This past quarter, New England gas prices experienced high degrees of volatility for a prolonged period. Emera Energy used its in-depth experience and market knowledge to optimize is pipeline transportation portfolio while serving its many clients' needs in a way that was not only financially beneficial to the business, but also well inside our risk tolerance.

We have worked hard to position ourselves well in this market, and we are pleased with the meaningful contributions for these efforts this quarter. Algonquin Power also provided strong contributions again this quarter. We exercised 12.56 million Algonquin subscription receipts into common shares, bringing our ownership up to 24.5% as of March 31. We realized after-tax gains totaling CAD18.1 million on three separate transactions in the quarter.

In the Caribbean, we remain focused on finding lower cost, less volatile energy sources for our Caribbean customers. Our current focus is in the Bahamian markets and in particular Grand Bahama Power Company. We believe that natural gas in the form of either CNG or micro LNG could be a part of the solution for these markets and specifically believe that we could find a potential solution by moving CNG from Florida to Grand Bahama. With that, I'll turn things over to Scott, who will give you a more detailed update on our financial results for this quarter. Scott?

Thank you Chris, and good afternoon everyone. Our first-quarter results were released earlier today and are now on the Emera website. As Chris mentioned earlier, Emera's consolidated net income in the first quarter of 2013 was CAD122.8 million or CAD0.93 per share compared to CAD80.2 million or CAD0.65 per share in the first quarter last year. When the results are normalized for CAD7.4 million of mark to market losses, 2012 net income was CAD115.4 million or CAD0.88 per share compared CAD81.8 million or CAD0.66 per share last year, and that should read -- should have said CAD115 million for 2013 net income, first-quarter 2013.

We saw higher contributions from each of our operating segments, but the 33% increase in adjusted earnings per share was primarily very strong performance within our Services, Renewables and Other segment. Excluding the effect of mark to market adjustments and, Emera's Services, Renewables and Other investments contributed CAD41.2 million to consolidated net income in the first quarter of 2013 compared to CAD7.3 million in the first quarter of 2012. The increase was primarily due to the following factors.

First, as Chris mentioned, we realized CAD18.1 million of after-tax gains on the conversion of Algonquin subscription receipts. There were no similar Algonquin gains in the first quarter last year. Second, the strong quarter in our Marketing and Trading business that Chris referred to resulted in an CAD8.5 million year-over-year increase in contributions to Emera Energy's earnings. And finally, there was a CAD6.8 million contribution from our interest in Northeast Wind Partners as a result of us settling all of our entitlements under various guarantee, warranty and performance obligations from one of its suppliers.

Nova Scotia Power contributed CAD63.2 million to consolidated debt income in Q1 2013 compared to CAD59.6 million in the first quarter last year. The increase was primarily driven by increased sales, which in turn led to higher electric margin, which was partially driven by low growth and the impact of colder weather. Maine Utility Operations contributed $8.9 million to consolidated net income in the first quarter compared to $8.5 million for the same period in 2012. As similar to NSPI, results were positively impacted by the colder weather this quarter. Caribbean Utility Operations contributed $4.1 million to consolidated net income in the quarter compared to $3.9 million last year.

Pipelines delivered consistent net income year-over-year, contributing CAD7.2 million in the first quarter of 2013 compared to CAD6.8 million in the first quarter last year. Our corporate costs were CAD9.2 million in the first quarter compared to CAD4.3 million last year. This increase was primarily due to higher business development costs as a result of increased activity in that area. That's all for my financial overview. And now we would be happy to take your questions.

(Operator Instructions)

Juan Plessis, Canaccord Genuity.

Thank you. You mentioned the strong marketing opportunities in the quarter in New England. Do you see continuing opportunities in this market or was that mostly a temporary phenomenon?

Juan, we will ask Judy to answer that for you.

Hi Juan. It really was a function of high demand for natural gas and some supply constraints that are largely around existing pipeline infrastructure. So I would say there is potential for it to occur again with that level of volatility, but a deep [canucks] is scheduled to come on this summer, which will bring additional supply to the equation, so it's hard to predict exactly. So we have to wait and see. But certainly this winter was -- it was largely a supply to the market issue, and I think we do believe that will be mitigated through the balance of the year.

Thanks for that Judy. And you had some improved plant performance at Bayside. Do you think this Bayside performance is an indicative quarter to use going forward?

Well Bayside, you'll recall that Bayside is under PPA for the winter months, and now it's essentially a merchant facility for the seven summer months. But yes, the improved performance was a result of the capital upgrade that we made to that plant, which improved repeat rate and its output. So that is -- that should follow through and be consistent. But again, I do remind you that it's under PPA for five months of the year and merchant facility for the other seven.

Right. Thanks for that. And just lastly here, maybe Chris, there is some higher business development costs in the quarter. What do those mainly relate to, and do you expect a higher BD run rate in 2013 versus last year?

So yes, we continue to pursue new development opportunities as we continue to look to driving future earnings growth, and the reality is as we pursue certain projects, it can be lumpy in terms of that pursuit. So there are periods and quarters like we had in the first quarter were we've got more activity and incurring more costs. I would see that run rate continue through the balance of the year. That activity was in fact higher in the first quarter. But those costs can be occurred in the lumpy way, and that's what we experienced in the first quarter.

Great. Thank you very much.

Ben Pham, BMO Capital Markets.

Just on the note about the business development expenses and then thinking now part of that is looking at some acquisitions potentially, and maybe you could just provide a quick update on the acquisition outlook in your core areas and some of the things you've been looking at over the last few quarters -- or sorry, over the last quarter.

Ben, thank you for the question. I think we continue to be primarily focused on our overall retail development activities. We would always continue to keep our eyes open on the acquisition side, but our primary focus is on that greenfield activity. And so it doesn't matter whether you're in Atlantic Canada in New England or in the Caribbean, we see lots of opportunities to build new projects, whether that be things like the power plant in Grand Bahama or the Maritime Link that we're talking about here in Atlantic Canada. That's really where our focus is. From time to time, there may be acquisition activity, but that's probably less frequent.

Okay, thanks for clarifying that. And just wanted to also ask about just on the load outlook, the demand outlook there in your core areas and if it's turned up a little bit this quarter relative to last year. Maybe just in general terms of -- it's been four months are ready, just your load outlook or the balance of the year in your core areas.

Well, we certainly have seen the demand from customers increase a little bit, and certainly the winter was a better winter, and Bob (inaudible) may be able talk a little bit about Nova Scotia Power.

Thank you Chris. As Scott mentioned, the winter was favorable to us because of the cold weather, and I think the load is solid, slight increase but solid would be my description.

Gerry, any comment?

I'd echo what Bob said. In maine we've had a reasonably cool winter. More of a norm than what we've seen over the last couple of years. As well, our load in general has transformed from a number of years ago to what was largely industrial base to something that's more commercial and residential based. So we don't have the large fluctuations any longer that come along with some of the challenges that industrial businesses have had in the state of Maine.

I think the other thing I would just add to that is we are seeing a beginning trend, and I'd say it's early, early days, but in seeing people move from oil, which essentially is the primary alternative here in these markets, moving over to electricity especially on the heat pump side. We are beginning to see that happen. It's kind of early days, but that's very encouraging for our business and something that our business are focused on, because at the end of the day, it saves customers money and it also reduces -- is more efficient and reduces the amount of energy consumption overall. It's a great opportunity, but it's early days.

Great. That's it for me.

Paul Lechem, CIBC World Markets.

First question on your investment in Algonquin Power, so you're now up to 24.5%. Just first on that, I thought you were limited to 20% ownership by Maine, did that get altered to allow you to increase that investment?

It did. We went for further application and got approval to go to 25%, and in fact, we also just recently went before Algonquin shareholders again to allow us to continue to maintain that 25% ownership. So we're very close. And we're continuing to look to hold ourselves in that range.

So the intention is to keep the pro rata share at 25%.

It is, and as you know, Paul, Algonquin has a great portfolio of investments and also a great pipeline of future investments both in utility type activities and also in contracted clean generation, so we see that as a great investment opportunity for us for the future as well.

Fair enough. On your capital spending for 2013, you reduced the plan for NSPI by a chunk. Can you talk about what that's about? Where you've reduced spending at NSPI or the spending plans?

Bob Hanf speaking. We reduce our capital plan by proximally CAD80 million, and the concept there was we took a hard look at our capital expenditures and moved out what we could into future years, and that's very much in accordance with the direction of our regulator and listening to our customers about future rate increases. And that reduction allows us I think to be responsive to that. But those -- everything that's essential is being done, and service levels are being maintained and we're not compromising in any way. So those projects -- we just took a really hard look at that and moved them out into future years.

Okay. And so just trying to also square away the different numbers in terms of CapEx plans that you put out there for this year. In your latest investment presentation, you have a range of I think it's by CAD550 million to CAD625 million for the year, and your year-end 2012 forecast is CAD831 million. What kind of range or should we be thinking about for total CapEx spend now for 2013, and what does it include? Does that include your investment in the Labrador Island Link as well? I'm not sure what's in and out of it.

It would include everything, so it would certainly include our equity investment in Labrador Island Link and our capital spend on Maritime Link. I don't believe there's been any sort of material change to the range of CapEx profile that's on our website in our investor relations report, Paul, so I think that's still a reasonable range to be assuming at this time.

Very nice. When's the next round of investment in Labrador Link, when is the call for that?

It's likely going to be in early 2014. We likely -- it's possible that we'll see some. We don't necessarily control the timing on that, but if there is any more in 2013, it will be modest.

Perfect. Thanks very much.

Linda Ezergailis, TD Securities.

Thank you. Just wondering if you could elaborate on the complaints on the New England transmission ROEs and what the basis of the complaints are and what sort of ROE is being suggested. And what sort of timing there might be to resolve this.

Sure Linda, this is Gerry from the Maine utilities. As you know, the low interest rate environment I think is creating pressures on ROEs across -- regulated utilities across the United States, and I think the real question is what is the appropriate risk premium that utility should be earning, particularly in an environment where I think there's still strong demand for capital. So at the end of the day, I think -- and it's not only the Maine Utilities, but all the New England utilities that are the subject of this complaint, but at the end of the day, I think we've demonstrated a case where the ROE that we have today is in the range of reasonableness for this environment. We won't -- I can tell you what has been suggested by the complainants which is roughly in line with the recommendations by FERC staff is around the 8.9% range. But at the end of the day, we don't know what to expect until the Commissioners at FERC actually rule on that.

When do you expect a ruling?

By the end of this year.

I think, Linda, it's important to note as well when you look at the range of reasonableness, it goes from somewhere in the high [sixes] all the way to somewhere in the high [11s]. So the range is very wide, and all the staff has done at this point is pick the midpoint of that very wide range. So we really do have to wait and see how the commission actually looks at that. They certainly have promoted attraction of capital to the leads in the transition system in New England. We've stepped up to that as have many utilities in that marketplace. And I don't think they want to stop that activity because there still are needs there as well. So we're looking at it in that light, and at this point, it's a very wide range.

Thank you. And what is your Bangor Hydro current transmission rate base and equity thickness?

Its actual thickness which is a little higher than 50% right now, but we target roughly 50% equity.

And the rate base is about CAD1 billion?

The rate base for transmission is closer to CAD400 million.

Okay, thank you. And just to follow-up question. Can you just confirm that for Maritime Link, you will be booking AFUDC to earnings probably by the end of July once the regulator provides a decision?

Yes. And matter-of-fact were doing that currently, so we are on the basis of this being an intended regulated investment, we're booking AFUDC on the capital investment as we go.

Okay, thank you.

Matthew Akman, Scotiabank.

Hi, just a follow-up on Maine ROEs. Was there a change in the ROE at MPF?

Yes, there was a recent change in the ROEs at MPF, an expectation but the case -- the recent transmission rate filing at Maine Public Service was litigated. It would be set probably lower than what we actually settled on. But it changed from 10.5% down 9.75%.

Okay. Thank you. On Grand Bahama, there obviously was a generation investment last year which was starting to pay off, and margins have actually expanded. But it looks like operating costs in the Caribbean are up, so I'm just wondering how you guys see the net impact of those things playing out over the next year or two.

Well, we continue to see improvements in the earnings of that business, and we're continuing to work in that direction, and so we see that gradual improvement occurring. The other thing that we're quite focused on, as you know, Matthew, is actually getting some natural gas in there and being able to reduce the overall cost of fuel to that market as well. So I think that whole thing is going to come together over the next year or so and will have a good sense of where we're going, but we are seeing the profitability of that business continue to recover.

Okay. Thanks very much. And one last cleanup on Caribbean. I think you guys got it to CAD58 million of CapEx there for the year. What is the major one or two items in that bucket?

That's primarily going to be driven by a generation investment in Barbados Light and Power. That's the next step to take there. Barbados Light and Power is in a position where they can -- they do have a need for future generations, and so we're working our way through that with the regulatory process. They have actually done a very good job this past year on integrated resource plan for the region, looking at how renewable's might fit in the future, and also looking at how natural gas could play a role if we can achieve getting natural gas into that market. So all those things are playing into future investment there.

Great. Thanks very much. Those are my questions.

Robert Kwan, RBC Capital Markets.

Good afternoon. If I could just come back to the energy services, and Judy, if I understood I think your explanation, it sounded like a lot of the process were made based on as you said pipeline constraints, but really it was basis differentials.

Yes, so we make our money by connecting people who want to buy gas with people who have gas to sell. And in a constrained market, the fact that we've been playing there for almost 10 years now and have over 150 counter parties that we can look to makes us able to help people in those circumstances.

I think, Robert, the other thing that I would add is that the actual footprint for Emera Energy Services has expanded quite dramatically from the time that we would've seen the last significant volatility in that marketplace to today. So their position on many pipelines now gives them the ability to move gas around the region in a fairly good manner, and so it lets them help customers out as they need to be able to supply, especially the electricity side.

And I guess so on that, you hold from transportation rights on various pipelines?

Yes. So we would kind of annually take some positions as we're able to bid into -- be successful in terms of bidding for them. And that puts us in a position to move gas from place to place.

Do those term transportation rights give you the right to roll that over kind of on a right of first refusal type basis to the next year?

No, not generally. They're generally rebid.

I think there's a combination of two different kinds. There are some that are quite short-term, which is what Judy is referring to right now, but there are also some that are quite long-term, and as a result of relationships we're developing in the Marcellus gas producers and so we are able to move that gas over pipe over a fairly long period.

Okay, so it sounds like it was more of a tactical call by the team rather than some underlying option that you're going to have on term transportation from year to year.

Right. Yes.

Okay. I guess just the last question on that. You mentioned you have CAD8.5 million increase year-over-year. I'm wondering can you give us what the absolute margin that business produced in the quarter?

I don't think we generally disclose that.

So we have it, but it is a very material increase year-over-year.

Okay. So maybe it's coming off of a relatively small base.

Correct.

Just the last question I've got. Can you comment where you are on the Northeast Energy Link project, and as part of that, if you have any comments on the Northern Pass project as well?

So, Gerry if you want to give us a bit of an update on where you are.

I think we've seen a number of positive developments on the Northeast Energy Link. I think the increasing demand for contracted renewable's in Massachusetts as a result of new legislation there changing the Green Community Act has driven a significant amount of demand for long-term contracted renewable's. As you know, our relationship with First Wind has given us an opportunity to develop as much as 1000 mega watts of renewable's on sort of the supply end of this line to fill the pipe. And then I think third, the most positive development has been with siding in the state of Maine, where the state of Maine has created a corridor and allowed projects like this to site within that corridor. And so we're going through a siding process right now with the state of Maine that will allow us to basically site about 80% of this line and deal with only one landowner over that. So all in all, I think there been some positive developments that are seeing us -- giving us a view towards a project that we can actually develop here.

So fundamentally, we see ourselves as getting this project ready and watching two things develop. One being the actual demand side develop as the states are deciding how they want to go forward, and what role they see both wind and Hydro playing in that. So from a Hydro perspective, we think of certainly about what's going on at Nalcor as well. And on the other side, and so specifically to that, we're actually seeing some very interesting developments right now in Connecticut. They certainly are in the process of debating some changes in the legislature as to how they want to acquire clean energy and how that comes together, and that we see as very positive to this type of activity. And then lastly, pulling together the supply side, whether that be First Wind or Nalcor or whether that be other regional suppliers. So those are the kinds of things we're working on, and it continues to advance in that light and developments are -- positive developments are happening in the market.

And any commentary as to how your project relates or competes against Northern Pass?

We don't see them as being in competition. They actually are quite different in the way they're approaching the market and the points at which they deliver energy. So we're quite comfortable with what we can provide to the marketplace, and that's really where we're focused.

See you feel there's room for both to go ahead in roughly the same timeframe?

Well, they are different. And so I think what we're offering the market is firm, clean energy delivered essentially into the Boston area. Duxbury, Massachusetts is one of the only locations in southern -- or in the southern part of New England that can actually take1200 mega watts right into the low pocket. So we're actually seeing that as a feature unto itself.

I think to put a particular point on it, the increasing renewable objectives collectively for the New England states creates a gap of about 5000 mega watt's by 2020, and if you add the two projects up, and in fact, if Northern Pass was delivering renewable energy, which in most cases is not qualified as renewable, you still only have about 2000 mega watt's of supply. So there is a pretty strong demand.

That's great. Thank you.

(Operator Instructions)

Andrew Kuske, Credit Suisse.

Thank you, good afternoon. Just a question on your balance sheet -- I guess this is directed to Scott. Just how do you see the balance sheet positioned, and in light of the recent shelf filings, where do you see the positioning of your balance sheet from a debt equity and also a [Pref] composition.

Yes, so we, Andrew, continue to work towards target capital structure in the range of 55% debt, 35% common equity and 10% preferred share equity. And so the filing of the shelf prospectus has allowed us to do pref share, and medium-term note financing's is just really a replacement of a shelf program we had in place before that will continue to access both those forms of capital and common equity over time as we continue to invest our capital in projects like Maritime Link and LIL and look to all three forms of capital for that target structure as we finance those investments.

Do have a bias towards say preferred shares at this point in time especially with the big capital needs on Maritime and other related transmission projects associated with that endeavor? Just because less dilutive in the front end and financing costs are relatively attractive?

Yes, a bias -- I am not sure I'd say that. We have a bias within the degree to which that's an important part of our capital structure, and so we will use them. And there's no doubt that the market today is providing an opportunity to look at pref shares with some pretty competitive and attractive terms. So we will look at those and continue to balance that capital structure. I think you can also look at our capital structure today and relative to that target capital structure that I spoke to, we may be a little overweight on debt and a little under underweight on prefs as we said today. So that might be a message in terms of how we are looking at our near-term financing requirements as well.

Okay that's very helpful. And then a completely different question for my second. Just on the biomass facility in Nova Scotia, how is the completion of that project coming along, and when will we see first fire?

I'll ask Bob to respond to that.

Thanks Chris. It's coming on quite well. And the budget was CAD208 million, and it would come in within the CAD208 million. And we expect supply to the grid by July of this year.

Andrew, the machine's spinning as we speak. So we've done the boiler blow-downs with the machine has been brought to speed, and it's actually been run through some high-speed runs. So we're just about ready to capitalize and could actually be synchronized today. I haven't checked lately but -- not today, but very close to producing electricity.

That's very helpful. And I guess just a brief follow-up on that question. Now obviously the situation where the large load is unique in Nova Scotia and you're the dominant utility, really only utility in Nova Scotia, but would you explore any other possibilities to do biomass elsewhere in the Northeast within your target footprint?

Well, we've thought about that over the years. I would say that if you watch the evolution that's going on right now with the southern New England states, they're actually starting to discount biomass as being a part of their future, so we're actually seeing that active change. So that would be the hesitation towards making that step. I've always thought that some of the coal fire facilities could at least be put to that use, but it hasn't really become a popular thing in New England. So with that -- in that light, we will probably stay focused here for the time being.

But it is a good option for Nova Scotia, and I think over time as people decide -- step back for a second, the Acadian Forest is a great opportunity I think as a resource. It is in transition. And I think whether it's Nova Scotia, New Brunswick or the state of Maine, there is a lot of work going on today to figure out what the Acadian Forest -- what use it's going to be put to over time. We hear people talking about the highest and best use, and we're very supportive of that approach, but at the end of the day, part of that will include energy production we believe, and so we're going to stay very close to that issue and to see how it evolves over time. But for now, it's probably more of a watch and brief than it is direct activity at this moment.

Okay, that's very helpful. Thank you very much.

There are no further questions registered. I would like to return the meeting over to Mr. Huskilson.

Thank you very much. We're speaking to you today from the Emera Centre North site in North Sydney, where tomorrow we're very proud to be holding our first annual meeting outside of Halifax and right here in Cape Breton where both it is the location where the Maritime Link will ultimately come ashore, and it's also the location of many of our operations at least on the Nova Scotia front. So we're proud to be here, and we hope that all of you will be able to participate in our webcast tomorrow of our annual meeting. We look forward to hearing from you, and thank you very much for this afternoon.

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