Emera Inc (EMA) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Emera second-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.

Thank you. Good morning, everyone, and thank you for joining us for our second-quarter conference call this morning. 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 second-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 morning, Chris will begin with the 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'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 and now I'll turn things over to Chris.

Thank you, Jill, and good morning, everyone. Emera delivered Q2 consolidated net income of CAD44.9 million or CAD0.34 per share, compared to CAD53.2 million or CAD0.43 per share in Q2 of 2012. Year-to-date consolidated net earnings increased rather substantially to CAD167.7 million or CAD1.27 per share, compared to CAD133.4 million or CAD1.08 per share for the same period in 2012. Overall, a strong first half of the year. Scott will take you through the details of the quarter, later in this remarks.

Beginning with our most recent developments on Maritime Link, in June, the project received environmental assessment release from the Federal Environmental Assessment Process, as well as environmental approvals from the provinces of Newfoundland and Labrador, and Nova Scotia. Receiving these environmental approvals was the result of more than two years of study and assessment, extensive engagement with First Nations communities in Nova Scotia, and Newfoundland and Labrador, as well as consultation with land owners, fish harvesters, local businesses and other stakeholders.

Another important project milestone was achieved on July 22, when we received the UARB's decision on the Maritime Link. This marked another important step on our journey to project development. The UARB has approved the project, subject to certain conditions, including an assurance that additional market-priced energy will be available to Nova Scotian customers. Regulatory decisions often come with conditions, and our project agreements anticipated that. We are working with Nalcor to respond to these conditions. The response will be subject to further approval by the UARB.

In the meantime, engineering and design work is progressing well, as we advance towards final construction estimates for Q4. In Nova Scotia, Nova Scotia Power's biomass facility in Port Hawkesbury began commercially operating in July, and is now producing both electricity and steam. The Port Hawkesbury biomass plant can produce up to 60-megawatts of firm renewable energy, and created 30 new operations jobs. This project was completed on budget, and its energy will play an important role in meeting Nova Scotia's renewable electricity goals, while providing an environmentally responsible firm source of energy for our province.

In Maine, our proposed Northeast Energy Link continues to progress. Recently, both Massachusetts and Connecticut issued Requests for Proposals for contracted renewables. This should drive the need for up to a 1,000-megawatts of new renewables in New England and demonstrates that demand is strong. New renewables at some point in this process of procurement will require transmission, as the existing transmission system is not capable of delivering all these requirements. We believe our Northeast Energy project will be well positioned to provide a solution. In addition, this RFP represents opportunity for our First Wind investment.

In the Caribbean, our subsidiary in Barbados, Light & Power Holdings, acquired 52% interest in Dominica Electric Services Limited, or DOMLEC. While the utility is small, with a generating capacity of 26-megawatts, we see growth opportunities around this integrated utility, as there is a geothermal resource on the island. If developed, we see this clean energy source having the ability to provide reliable low cost electricity for DOMLEC's customers. With respect to other initiatives in the Caribbean, we remain focused on finding less volatile energy sources for our Caribbean customers.

For the Bahamian market, and in particular Grand Bahama Power, we believe natural gas in the form of CNG or micro LNG could be part of the solution. Specifically, we are exploring a potential solution by moving CNG from Florida to Grand Bahama, and are well into conducting front-end engineering and design work to confirm its viability. Our target is to complete feed studies and to be in a position to make a final investment decision by the end of this year, and to make an export application in the Fall. With that, now I'll turn things over to Scott, who will give you a more detailed update on our financial results. Scott?

Thank you, Chris, and good morning, everyone. Our second-quarter results were released earlier this morning, and are on the Emera website. As Chris mentioned earlier, Emera's consolidated net income for the second quarter of 2013 was CAD44.9 million or CAD0.34 per share, compared to CAD53.2 million or CAD0.43 per share for the second quarter of 2012. When the second-quarter results are normalized for mark-to-market gains, 2013 adjusted net income was CAD42.6 million or CAD0.32 per share, compared to CAD46.3 million or CAD0.37 per share last year. The CAD3.7 million decrease in adjusted earnings is primarily due to recognizing CAD11.6 million of after-tax gains in the second quarter of 2012, on the conversion of Algonquin subscription receipts into Algonquin common shares. There were no similar gains recognized in 2013.

Prior-year gains were partially offset by increased earnings this year in Nova Scotia Power in Maine, and in the Caribbean, as well as increased equity earnings from our interest in Algonquin. Nova Scotia Power contributed CAD18.5 million to consolidated net income in the second quarter of this year, compared to CAD16.8 million last year. This increase was primarily driven by increased sales, which in turn led to higher Electric margin. In 2013, Nova Scotia Power anticipates earnings within its allowed return on equity range, and continues to focus on cost control, productivity improvements, and making regulated investments in renewable energy and system reliability. While Nova Scotia Power's results are currently up CAD5.3 million year-to-date over 2012, we anticipate NSPI's full-year earnings to be consistent with that of 2012.

Maine Utility Operations contributed CAD8.9 million to consolidated net income in the second quarter of this year compared to CAD7.3 million for the same period in 2012. Results were positively impacted by load growth and lower OM&G expenses due to increased capitalized construction overheads, as a result of higher capital spending in 2013 and decreased employee benefits. Caribbean Utility Operations contributed CAD7.7 million to consolidated net income in the second quarter of 2013 compared to CAD5.4 million in the second quarter last year. The higher net income was primarily due to increased Electric margin and increased other income associated with the acquisition of 52% of DOMLEC, the electric utility in Dominica.

Pipelines contributed CAD6.8 million in the second quarter of 2013, compared to CAD7.3 million in the second quarter last year. Excluding the effect of mark-to-market adjustments, Emera's services, renewables and other investments contributed CAD3.6 million to consolidated net income in the second quarter of 2013, compared to CAD15.3 million last year. The decrease was primarily due to realizing CAD11.6 million of after-tax gains in the conversion of Algonquin sub receipts, as previously mentioned. There were no similar Algonquin gains in the second quarter this year. That's all for my financial review, and now we'll be happy to take your questions.

(Operator Instructions)

Our first question is from Ben Pham from BMO Capital Markets.

Just on the Maine transmission or release could you elaborate more on the judge's recommended decision? Just what's the main driver for the recommendation of lower ROEs?

Yes, this is Gerry Chasse from Maine Utilities. Thanks for your question. I think the main driver is basically change in the market rates, but at this point, what I think has really happened is we've just taken another step along the path where the FERC Administrative Law Judge has made it a recommendation on those ROEs for both the refund period and the going-forward period. But effectively what he's done is handed that over to the FERC commissioners to make that final decision, and we expect that final decision will happen sometimes in the fourth quarter of this year or the first quarter of next year, so we're awaiting that decision.

Okay, thanks Gerry. And can you remind me what your rate base is that's subject to the potential lower ROE?

I believe rate base and transmission, and this is just a ballpark number, but it's in the [CAD]300 million range.

Okay, and is there any pushback on the [deal] equity?

No.

Okay, great. That's it for me.

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

Chris, with respect to the provision on the UARB decision on the Maritime Link that requires assurances for additional market priced energy. Can you talk a little bit about where you are in your discussions with Nalcor and perhaps your best estimate of timing as to when you might be able to announce something on this?

Thanks, Juan for the question. It's really a bit too early to say where we are with the process. We are actually spending time working with Nalcor, and working our way through the issues, but as you know, that's going to be subject to a further process that the UARB will run, and so that's really where we are. When we step back and look at where we are with the whole project, we've had two major milestones that we've hit in the last quarter, both the environmental assessment release and also the decision from the regulator and so that we see that as progress for the project and we continue to work with our partner to move that along. And if you look at the actual project development agreements, they anticipated the possibility that a condition could exist, so we're working through that under those agreements.

Okay, thanks very much. Is it fair to say that you're probably well into the discussions at this point?

Of course. We obviously have an ongoing relationship with Nalcor over many, many things, and so this is just one of these things that's on the table as we work through the project.

Great, thanks and a question, perhaps for Scott. In the quarter you recorded a gain on the purchase of DOMLEC of CAD2.5 million. Can you explain from accounting perspective how a gain came about on the purchase of that asset?

Yes, Juan. So it's CAD2.2 million after tax in the quarter, and in non-accounting terms you could really think of it as the difference between the purchase price and the rate base that we acquired, so technically it's the difference between the purchase price and the fair market value of the assets that we acquired, which really roughly equates to book value or rate base.

Okay, great. Thanks very much.

Thank you. Our next question is from Paul Lechem from CIBC.

Oh, thanks, good morning. There's some news out of the potential LNG project in Nova Scotia in the quarter. I was just wondering, does that present any opportunities for you? It's adjacent to the Maritime and Northeast pipeline, they will obviously need power at some point. Have you had any discussions with that project and do you see any opportunities there?

I think Paul, there are several proponents in Nova Scotia today thinking about LNG and how the whole thing evolves, and so I think any of that kind of development that might happen in this region would be good for the region, and therefore provide some opportunity for investment. Utilization of the pipeline, more gas resources in the region are all very important. One of the things that's happened in the past little while, as you know, we were challenged for supply this winter, and that translates right up into the Northeast, so it is going to be very important over the next several years that we find new sources, Encana coming on with Deep Panuke will be very important, and as well, what happens both onshore and with LNG will also be important to the region. So I think any time something like that is going on, it's good for the region, and at the end of the day, we'll provide opportunities. It's just very, very early.

Okay, fair enough. Just quickly on the Caribbean as well, the CapEx budget for this year seems to be coming down. Although you talked about the acquisition of DOMLEC and also you mentioned the CNG from Florida and work under way there. Can you explain what's going on there in terms of this year, your investment there? And also, just on that CNG export you said final investment decision by end of this year. If you go ahead, what kind of time frame would that be to get that up and running, and what kind of level of investment would that be? Thanks.

First of all, in general I think all you're seeing is a bit of a timing issue, both with generation development and also with the CNG development. And so that's primarily what is causing any changes. When we look at CNG specifically, we've gone through a pre-feed process and obviously have passed that hurdle, and we see economic value in that marketplace for bringing gas in the methodology that we've described. Now we're in to the detailed work, and so we're doing the engineering necessary to let us understand exactly what the capital is, so it's a bit early to say. But it's in the order of CAD40 million to CAD60 million. That kind of neighborhood, and that's primarily what we're trying to figure out now with the feed work.

What we have been able to do is secure access to pipeline capacity in the region. We've been able to secure access to port facilities on both ends, and we've done the work with the generation developer -- or sorry the generation supplier, so that we know what it's going to take to convert the units that we have in order to be able to burn natural gas. So when we put all those things together, that will give us a final outcome. The last piece though, will be to get the export permit, and that's something that we're believing we can apply for in this Fall.

Thank you very much.

Thank you. Our next question is from Andrew Kuske from Credit Suisse. Please go ahead.

I guess this question is for Chris, and it's just getting a bit of color and context around, I guess, the balance of your business development programs internally and just all the efforts you have going into the Labrador Island link, and the maritimes projects. That's obviously taking a considerable amount of capital resources, personnel. And then obviously when those projects are done, you'll have a lot more cash flow in the future, so how are you balancing that full-fledged effort right now with just Business Development on a normal course of business today and then looking at say the next five years?

So Andrew, thanks for the question. I guess first of all when you think about our business, it's really invested in two regions, one being the Northeast, and the second being the Caribbean region. So I'll start with the smaller first, and so the work that we're doing in the Caribbean region is primarily focused on fuel switching, investment in renewables, and utilities as the opportunity is there, including base generation. So if we put those things together there's a program that would see our strategy implemented, and a lower cost structure for customers in that region. That's our focus for that particular initiative.

If you go to the Northeast, it has a very, very similar focus, in that it's about putting more clean energy to work in the region, stabilizing costs for customers, making a better future when it comes to cost structures and opportunity for clean energy. And so we just continue to work down that path, whether that's investment in generation, whether that's investment in transmission, or investment around our existing assets. That's really the way we look at it. So specifically, the projects that we're doing with Nalcor will make new energy available, and there are opportunities for follow on around that project. As well, what we're doing in New England, whether we're working with First Wind, or whether we're working on transmission, or whether we're working to source other gas and things like that. Those all fit together to produce a solution that can provide opportunities for further investment. So we see that activity as being both complementary to what we're doing with Newfoundland and Labrador, and here in Nova Scotia, but also as follow-on opportunities.

So I don't think it's going to get any less busy subsequent to these projects being put in place. The other thing that I'd say is that we have built and are building a much stronger capacity in the organization to do these types of projects, and so the fact we have a team working in the Caribbean, a team working on the Nalcor activities, and a team working in New England today puts us in very, very good shape as we go forward. Because, for us, the biggest single challenge is ensuring that we have the people that we need to get the job done. There seems to be lots of work out there, and lots of opportunities for solutions.

Okay, that's very helpful, and then I guess, just related to that, do you have any thoughts on the M&A market as it stands right now?

Yes, I always have the same thing to say about the M&A market, and that is that on the utility front, it's challenging, because the premiums are so high. On the generation front, it's all about making sure that if there's something there, you get it at the right price, so that you have an opportunity to make money with it. So I don't think things change that much. To me, to make a utility acquisition today there needs to be a lot of strategic opportunities around it, and investment that can go forward. And we don't see that many of those, but we're always looking.

Okay, that's very helpful, thank you.

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

Just on Maritime Link, outside of the market-priced energy condition, just wondering if there was anything else in the UARB decision that caused you any concerns?

Well I guess I'd just say that we do have conditions, and those conditions, clearly, we have to respond to every one of them. Many, many of them were responded to, I would say, on the stand. And so I think the regulator put forward conditions that would really just essentially codify what was put forward on the stand, and so those are conditions that we would have seen throughout the hearing. And then the others also, I think, emerged through the hearing as well. I don't think anything that came in that decision was a surprise to us, after having gone through the hearing. So I think we're well prepared both through our agreements and through our relationships to be able to respond, and that's what we're doing.

Okay so it sounds like really it's a market priced energy and working through that, that is obviously it's the key condition, but probably the biggest one that's not, doesn't seem like much else of a concern?

Yes, certainly that's the one that we're focused on working with our partner and it's -- the timeline is still something that is hard to predict. It's too early to tell what the timeline will be at this point, just because of the fact there will be a process, but it's not clear what the process is. So UARB has said they will deal with it in an expedited fashion and we think that's very appropriate, and we're working with that.

That's great. Just last question, just within services, renewables and others and utility services specifically. I know revenue isn't necessarily an indicator of earnings, but revenue generation during the quarter was the lowest in the last couple years. Q1 in 2013 looked a little soft as well. Just wondering if there's any underlying trends?

Maybe I'll just make a general comment, and Scott might want to chime in, in more detail. I think fundamentally it's a project-based business, and so since it's a project-based business, as projects get going, that sees high levels of revenue and as they wind up, then they're looking for other projects. To some extent the slowdown in the Caribbean market has been part of that, and also, I think award of contracts in this region have been slower than expected as well.

That's a good answer.

Is there anything on the horizon like is this temporary lull, but you've got good sight line into the back half of the year or very late in the year?

Well again, so we're working on a couple of generation projects in the Caribbean, and the services businesses is on that, so timing is always difficult to predict. And then lastly, they would be working hard to get some work out of the development that's going to happen in Labrador, so those are the things that the timing is -- we're waiting for the timing.

Okay, great.

Today Robert, a good number of the activities in escrow will come from equity-accounted investments so revenue and earnings contributions are the same, so the swing of that revenue profiles a little differently, obviously. So when you look at assets like Bear Swamp and our investment in Algonquin, increased contributions and earnings don't necessarily drive a magnified increase in revenue, but nonetheless, we do continue to see increased contributions in earnings.

Great. Thanks a lot.

Thank you.

(Operator Instructions)

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

I realize it's a dynamic planning process, but perhaps you can give us an update on what your financing plans are for the next year, based on what you see in your CapEx, and how you'd rank the different options?

Yes, Linda, I think that answer not a whole bunch different than what you've heard before, in the sense that we continue to look at our balance sheet on a continual basis towards balancing our capital structure, roughly to 35% equity, 10% pref, and 55% debt-like structure. And as we profile out our capital spending requirements, and obviously Maritime Link and Labrador Island Link investments are notable within that, with that timing profiled in our investor deck and on our website. They will continually just look to rebalance and take the capital requirements outside of what the business itself generates, and look to raise capital progressively through all three forms of common equity, preferred share equity and debt, in order to maintain that target capital structure. So we'll probably over every 18-month kind of period likely cycle through or touch each form of capital, always working towards maintaining that balance.

Great, thank you.

Our next question is from [Tuck Dunkiss] from Scotiabank.

It's Matthew Akman. Question on Nova Scotia Power. Can you hear me?

Yes, go ahead Matthew.

Sorry. Nova Scotia Power. I think there is still modest rate-based growth here, but you're guiding to in-line earnings with last year. I'm just wondering where you see the modest headwind. Is it in operating cost, and I guess maybe update us on whether you think you can still earn what's in the allowed ROE band next year, with the settlement that you entered into?

It's Rob Bennett here. I'm not sure what you meant by modest headwinds, but I can say that it is the plan through the rate settlement agreement that we entered last year for the two-year period to earn within our allowed range.

Okay, I guess just to get specific, there is rate based growth in NSPI in 2013 versus 2012, right?

Yes, but very small, Matthew, recognizing the reduced capital spend, the capital budget as we announced earlier this year, so that rate-based growth is very modest this year, unlike the growth that we had seen in past quarters.

Okay, so yes, I mean that's why I was saying modest headwind because I figured there's a little bit of ROE compression in there. Is it operating costs or fuel expense?

So Matthew, there's some level of ROE compression from the settlement that we entered into last year, but for this purpose, I think it's appropriate to consider that the rate base is relatively constant over the few years that we're talking about here, and the earnings will be about the same as they have been last year, for example, relatively flat.

Yes, and I think Matthew it's fair to say that that's pretty much been articulated in the settlement, so that it really is expected that Nova Scotia Power would sit pretty flat through that settlement period.

I'm not looking for a lot of growth. Just thought that might be a bit. That's understandable. If I could just move to Maine, there was some discussion about the ROE potentially coming off. Are you guys still booking for the first six months of the year, the [11-14]?

Yes, so we haven't made any changes until we get a decision from FERC, and that's something that, as Gerry said earlier, we expect Q4 or Q1. But until we get that, it's really impossible to say where it is and so we're discontinuing on our existing numbers, until it happens.

I'm just wondering, I just don't know why the comment that it would have a more material impact on 2013 than in the future.

Yes, so the point there was that the FERC decision has a period of -- it impacts rate prospectively, but it also has a retroactive adjustment, and what came out of the Administrative Law Judge is that they were actually looking at that differently. They were looking at the rate application retroactively, different than prospectively which is interesting. But from our perspective, for example, if the FERC decision happened December 31 of 2013, it would impact 2013 for five quarters, because it has a 15-month retroactivity period, whereas in 2014, it would only impact it for four quarters. Now that comment was made before we saw at least the one recommendation, which we hadn't before, that they may look at the retroactive and prospective rates differently, but nonetheless there is a 15-month retroactive period where it's going forward and it only impacts a fiscal year at a time.

Even though the ROE is a bit lower than 2013 going forward it's still a bigger impact because of the 15 months. And my last question is on the Caribbean. So there have been some improved efficiencies in fuel costs with the new generation, and that showed up a lot in the first quarter. Second quarter, not so much. I'm just wondering if that's seasonal or is that, are the earnings flattening out there a little bit? I'm talking especially Bahamas.

Yes, I think there is a seasonal effect to the business for sure, just like there is in the northern systems. And as well, I think we're continuing to step-wise progress and so we've seen a progression that happened in Q1, you'll continue to see more progression through the piece, because it's not quite finished in the transition that we're making but it's more materially there than not.

Okay, so we shouldn't take the quarter -- because that's the gain in the quarter, it's down a little bit year-over-year, but we shouldn't take that as a new trend?

No, I wouldn't, no.

Okay thanks, those are my questions.

(Operator Instructions)

There are no further questions registered at this time. I'd like to turn the meeting back over to Ms. MacDonald.

Okay, well I'm not Ms. MacDonald, but thank you very much. I'd just like to thank you all for participating today, and your interest in Emera, and hopefully everyone will have a great day. Thanks a lot.

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