Emera Inc (EMA) 2014 Q3 法說會逐字稿

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Emera Third-Quarter 2014 Results conference call.

(Operator Instructions).

As a reminder, today's call is being recorded today, November 7, 2014, at 5.00PM Atlantic time. I would now like to turn the call over to Scott LaFleur, Manager of Investor Relations.

Please go ahead, Mr. LaFleur.

Good afternoon, everyone, and thank you for joining on our third-quarter conference call.

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 third-quarter earnings release were distributed this morning 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 then Scott will review the financial results in detail. We expect the presentation segment to last about ten minutes, after which we'll be happy to take questions from analysts. Please note that all amounts are in Canadian dollars, with the exception of Emera Maine and Emera Caribbean, where segment results were 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.

And now I will turn things over to Chris.

Thank you, Scott.

Good afternoon, everyone.

Emera delivered Q3 adjusted net income of CAD49.9 million or CAD0.35 per share, compared to CAD38.4 million, or CAD0.29 per share, in Q3 last year. Adjusted net income for the first nine months of the year was CAD240.7 million, or CAD1.68 per share, up 22.6% from CAD196.4 million for the same period in 2013. Scott Balfour will take you through the details of the quarter later in his remarks. But first, I'd like to touch on some of our key strategic initiative and operational milestones Emera reached this quarter.

I'll begin with an update on the Maritime Link Project. The construction of Maritime Link continues to progress as planned. The project is on schedule and on budget. We now have 200 people directly engaged in the Maritime Link Project. And through the signing of the labor agreements, we've achieved labor certainty through 2017.

We've opened offices in St. John's and Stephenville, Newfoundland, as well as Sydney, Nova Scotia. As previously reported, two of the three major contracts have been awarded to world-class suppliers: Nexans, for the subsea cable contract, and ABB for the two converter stations. The last remaining major contract for transmission construction is under evaluation and scheduled to be awarded in the coming months.

As we lock down more costs, we're increasingly confident with the reliability of our cost estimates. At the end of the year, we're expecting to have approximately 85% of the key projects contracted.

We now have one year under our belt for our New England gas plants, and they are performing better than our original expectations. Market conditions and capacity markets are better than our initial projections. We expect it to progress further with our Bridgeport plant upgrades. The upgrades are underway, with approximately $35 million in capacity added by the second quarter of next year. As the market changes, the New England gas plants are well-positioned; and we are increasingly confident about our forecasts.

Before New England can find long-term solutions for clean energy, Maine's energy infrastructure will need to be strengthened. Our MOU with Central Maine Power seeks to address some of these issues. Emera Maine and Central Maine Power will work together to enhance the strength and capacity of the state's bulk power grid and improve access for new generation sources.

Over 2100 megawatts of wind has been proposed, while more than 700 megawatts of contracts have already been awarded in Maine. And regional transmission solutions will need to be found to get this energy to market. In Nova Scotia, the construction of the South Canoe and Sable Wind projects are progressing well. The Sable Wind project, located in Kentville, Nova Scotia, is a 13.8 megawatt windfarm with six turbines. Construction of the windfarm is progressing well, with all turbine components delivered to site and assembly of turbines underway.

At South Canoe wind project, we've constructed all the roads and poured the foundations. Deliveries of wind turbine components are ongoing, and the assembly of turbines has begun. So 102 megawatts South Canoe wind project will be the largest in Nova Scotia.

Nova Scotia Power continues to focus on providing affordable and stable rates for our customers. To that end, we did not apply for a general rate increase for 2015. And we continue to work with customer representatives and the Government of Nova Scotia to manage the recovery of the fuel adjustment balance over a two- to four-year period. This, combined with a rate reduction due to the removal of the efficiency charge in 2015, should mean rate stability for all customer classes.

In New England, market drivers requiring the supply of clean energy and a decrease in GHG emissions are present. The drivers include approximately 3,000 megawatts of capacity retirements by 2017, aggressive and steadily increasing renewable portfolio standards, including mandated CO2 reductions. The circumstances that drive the desire for more clean energy have not changed. So we will continue working with officials to demonstrate we can assist in meeting the long-term requirements for clean energy.

In the Caribbean, our plans to move CNG from Florida to Grand Bahama are progressing. We recently received a FERC order clarifying that the US Department of Energy has jurisdiction over the project. We're currently completing our environmental assessment with the Department of Energy and are optimistic that we will receive an export decision in the first half of 2015. This initiative will contribute to our strategy in the Caribbean to introduce generation alternatives, including lower emission gas and renewables, with a focus on affordability and fuel cost stability.

In Barbados, our focus remains on affordable prices for our customers. We recently implemented some restructuring to improve efficiencies in the organization. As well, plans progress to build an 8-megawatt utility-scale solar plant. The solar plant will allow us to increase renewable generation and improve price stability in the country.

With that, I'll turn things over to Scott, who will give you a more detailed update on our financial results for the quarter.

Scott?

Thank you, Chris.

Good afternoon, everyone.

Our third-quarter results were released this morning and are now on the Emera website. Emera's consolidated net income for the third quarter was CAD28.2 million, or CAD0.20 per share, compared to CAD28.8 million, or CAD0.22 per share, in the third quarter of 2013. When the third-quarter results are normalized for mark-to-market impacts, adjusted net income was CAD49.9 million, or CAD0.35 per share, this quarter compared to CAD38.4 million, or CAD0.29 per share, for the same quarter last year. The increase in adjusted earnings is due to a series of factors, which I will touch on when discussing the segmented results.

Cash flow from operations for the first nine months of the year was CAD585.3 million, compared to CAD435.5 million in the same period a year ago. The 34.4% increase is primarily due to positive impacts of Emera Energy's trading and marketing group, contribution impacts from acquisition of the New England gas plants, and improved cash recovery in our regulated businesses.

Turning now to our segmented results. Nova Scotia Power contributed CAD10.9 million to consolidated net income in the third quarter of 2014, compared to CAD14.4 million in the third quarter last year. The decrease in the quarter was primarily due to increased OM&G costs due to storm activity and the timing of regulatory deferrals. NSPI's rate base and earnings for the full year are expected to be similar to that of 2013.

Emera Maine contributed $13.3 million to consolidated net income in the third quarter of 2014, compared to $9.2 million for the same period last year. The higher net income was primarily from increased revenues due to the settlement of a distribution rate case.

Emera Caribbean contributed $8.2 million to consolidated net income in the third quarter of 2014, compared to $11.4 million in the third quarter last year. The lower net income is primarily due to restructuring costs at Light and Power Holdings and a planned outage at Grand Bahama's Power Corporation.

Our Pipelines segment contributed CAD8.7 million to consolidated net income in the third quarter of 2014, compared to CAD8.2 million in the third quarter of 2013. Emera Energy delivered adjusted net income of CAD10.7 million in third quarter of this year, compared to CAD4.1 million in the third quarter last year. The higher adjusted net income was primarily due to contributions from the acquisition of the New England gas plants and higher contributions from our Bear Swamp interest.

Our Corporate and Other segment contributed a CAD1.9 million loss in the third quarter of 2014, compared to a loss of CAD8.9 million in the same period a year ago. The improved results are primarily due to a CAD9.1 million gain on dilution of Emera's investment in Algonquin this quarter, and a CAD7.0 million loss recorded in the third quarter of 2013 from discontinued operations for Algonquin Power. These impacts were partially offset by the CAD9.7 million increase in preferred dividends this year, of which CAD5.6 million results from the timing of dividends declared, as compared to that of the third quarter last year, with the balance of the increase from the new preferred share issuance earlier this year.

That's all for my financial overview. And now we'll be happy to take your questions.

(Operator Instructions)

Paul Lechem, CIBC.

I was wondering about your new guidance that you issued back in September when you announced your dividend increase and you've established a dividend growth target. I'm just wondering first of all does that negate or replace the EPS growth guidance you have previously? Or do you still have that in place?

Paul, it's Scott speaking. We've really focused on trying to provide a clearer understanding to the market as to the ability of the Corporation to grow its cash flows which clearly have to be linked to growing profitability. But recognizing that the profitability over time can be lumpy based upon the timing of capital expenditures and those kinds of things. We wanted to provide more clarity, improved clarity as to the ability to sustain a growing dividend.

And so really focused on the messaging around the growth of that dividend. Clearly there needs to be a relationship to earnings growth over time. But really focused on that core message around growth of dividend which is coming from the strong growing cash flows that the Company continues to generate.

Okay. So the base year for your five-year forecast for 6% dividend growth is that 2014 as the base year? And then looking out years, what gives you confidence beyond the 2017 timeframe for instance in terms of continuing to keep that growth going beyond there? And does it solely come from growth projects or would you contemplate a higher payout at that point in time as well?

I wouldn't say our expectation or our objective is to materially change our payout ratio. So obviously the growth in earnings and cash flow is coming within the core businesses that we have today and the development projects underway. Obviously we'll benefit from cash contributions from our larger development projects including the Maritime Link and the Labrador Link starting in 2018 when they go into operation.

And along the way we continue to work on a number of projects development initiatives that will continue to add to our capital plan for the period 2017, 2018 and beyond that we believe will allow us to continue to sustain that earnings and dividend growth.

For clarity the base here is 2014?

Yes that's right.

Maybe, finally on one of those growth projects that you talk about, Chris mentioned in his introductory comments that you talked about the MOU with Central Maine Power. Has there been any further development on that front since you announced it last quarter or is it just sort of a continuing effort there?

Maybe we'll just ask if Gerry would speak to that.

No immediate developments other than we have identified a number of specific projects that we will develop under the MOU. That are specific to the I would say efficient collection of wind in northern Maine. And as Chris mentioned, with over 700 megawatts contracted currently in looking to get to market as well as another 1400 megawatts on top of that, proposed in northern Maine, we see some significant opportunities there. To advance those projects.

And maybe Gerry it's probably worth mentioning that the fundamental work that's going on right now is on the design side. So we're actually looking to come up with the optimum design that will end up with the best outcome and the most energy delivered at the lowest cost.

Okay. Thanks, guys.

Robert Kwan, RBC Capital.

Just on Maine on the impact of the new distribution rates I'm just wondering was that -- was any amount of that related to prior periods? And is there a way to quantify what the pickup is?

Well, it was largely driven by the recovery of investments in capital that had already incurred. The distribution rate increase that went into effect on July 1 of this year was roughly a 9% distribution rate increase which is about $6 million a year in revenue. I would remind you though that a portion of that was for the recovery of certain storm related expenses that occurred at the end of 2013. That total's about $5 million that will be recovered over the next five years.

Okay. But there was nothing material it sounds like booked in the quarter related to either earlier quarters this year?

No, not that I'm aware of.

Okay.

That's right, Robert.

Okay. There's a disclosure for Grand Bahama you had in the notes before it's in the MD&A now just around the earnings sharing mechanism that will be amortized in 2016. It was a pretty small balance at the end of 2013 I'm wondering is it more material and now it's which is why it's in the MD&A and over what time period is that amortized?

The materiality is not significantly different.

Okay. And then last question here.

Emera Energy as we think about going into this winter here, can you talk about the pipeline capacity that you have available to you for this upcoming winter versus last winter? Is it more? Is it less? Is it about the same or is there any sense you can give as well as to, are they the same pipeline systems and whether you have locked in any hedging to take advantage of any basis that you're already seeing?

Robert, it's Judy. I would say that we are coming into this winter with a bit less pipeline capacity than we had last winter. The reality is, is that we make decisions on what pipeline capacity we'd like to pick up based on the cost we can get it for and the money we think we can make on it. And the effect of the winter of 2013, 2014 was really the price up of that capacity much higher than we were comfortable making and outlay on.

So we're going into the winter differently positioned. We still have some -- we have a substantial amount of pipeline capacity still. We're happy with the positions that we have. It will be a different winter even if it's exactly the same winter because of course everybody's lived through last winter now.

So we're just into week one. We'll really see how it's going to play out over the next little while. It's very, very difficult for us to talk about specific pipeline positions we would have or what's hedged and what's not hedged and that kind of thing. I really can't get into that level of detail.

Fair enough, Judy. Just at a very, very high level understanding what you're saying, you've got maybe a little bit less capacity than you had last year and it sounds like the pricing of what you have picked up is probably a little bit higher than what you had last year as well?

Well maybe a little bit but we didn't -- we're cheap back here on the East Coast, Robert so we like to we didn't pay too too much for it. We like to know that we have a very, very good chance of at a minimum recovering the cost of our transport and of course that we would have on some certain days an opportunity to make some real money with it. So the reason we have less is because we refuse to pay materially more.

That's great. Thank you very much.

(Operator Instructions)

Andrew Kuske, Credit Suisse.

I'm not sure who wants to take this one but it's maybe a quirky one on some of the things in Maine. I saw that Catalyst Paper is looking to buy the mill in Rumford. Curious, does this mean anything for you from a power standpoint? Do you see this as being positive for load, do you see this as having any opportunities for you for your power portfolio in the region?

I wouldn't say, Andrew, certainly -- if it results in a more robust pulp mill, that might be good, but the pulp mill runs there now currently, I'm not sure it really would have a material impact.

Okay. That's helpful.

And then just a question as it relates to the equipment procurement for really the now correlated transmission lines and given the devaluation of the CAD. If you could go into a little bit about the exposures a question for Scott about the exposures you have on the equipment which tends to be priced in US dollars?

And then just the labor contracts which most likely are in CAD? Maybe just give us some color around that and how your hedged or not hedged on that?

Most of our procurement of non-Canadian related goods and materials has in fact been procured in Canadian dollars or otherwise has been hedged. So we're in pretty good shape and as Chris said we expect by the end of this year to have 85% of our key contracts in place. So I think we're in a pretty good shape as it relates to the foreign exchange related impacts.

So you don't really expect any notable change then from an FX perspective?

That's right, Andrew. The contracts that we're looking to finalize now are primarily Canadian-based contracts for the supply of the labor and work that things like foundations and so on which will all be Canadian-based.

Okay. Thank you.

There are no further questions at this time. I apologize. We do have a question from Ben Pham, BMO Capital Markets.

I just wanted to follow-up on that last question about the FX. And maybe just on a broader level, can you give us an update on your earnings sensitivity to the US dollar?

Sure. I can tell you that there was about a CAD1.5 million impact in the quarter from currency related impacts. If that gives you a guide, Ben.

Okay. Pretty small.

And then I've also been seeing some press about the title power side of things and I know you've been pretty quiet on that front for some time. Is this something that we should be paying a little bit more attention to?

So I think Ben, it's kind of early days in that area. On this round. So I can describe though, what our plans are right now.

And there was some discussion about whether or not we should talk about that this time but it's pretty small. But so we've actually entered a multi-phase approach that would see by next year, a couple of turbines put in the water producing about 4 megawatts in an array grid connected structure. That's going to give us a pretty good idea of both what the technology's able to do and whether or not there's more to be done.

And along with the deployment of those couple of machines, we're going to be doing two really major things. One is a lot greater analysis of what the bay will do and locations that we might be interested in.

And also secondly, on just how much of this activity can happen in the province. And so far on the small project, we've been able to get about 70% of the activity to happen right here in Nova Scotia so we're quite proud of that and we believe that that potentially leads to building some fairly substantial activity here.

The other thing that we've been able to achieve is DCNS is the backer of open hydro these days. They have a very solid balance sheet in that it's essentially owned by the French government. And so as their balance sheet is backing up the performance of these machines, so we're quite confident that we'll be able to get an outcome there. And have some reliability around that.

And if all that comes to pass, then we would see ourselves increasing the number of machines gradually to the end of the decade. We're not really looking to put a material amount of capacity in the bay at this point because it really is all about coming to an affordable outcome for title. But we are looking to see whether or not we can create some momentum in the industrial activity in the province around that piece.

So we'll start with -- we'll start small, working with a partner that has a very solid balance sheet and we'll see whether or not that can turn into more. But at this stage for the next few years, it's relatively small in terms of outcome for Emera.

Okay. Thank for the update, Chris. That's it for me.

There are no further questions at this time. I'll turn the call back over to our presenters.

Okay. Well, thank you very much, folks for your participation today in the call and your ongoing interest in Emera. And we hope everyone has a great weekend. So thank you, all very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.