Emera Incorporated (EMA) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Emera Q4 2019 Analyst Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Hastings. Please go ahead.

Thank you, Sharon, and thank you all for joining us this morning for Emera's fourth quarter 2019 conference call and live webcast. Emera's fourth quarter earnings release was distributed this morning through Newswire and financial statements, management's discussion and analysis and the presentation being referred on this call are available on our website at emera.com. Joining me for this morning's call are Scott Balfour, Emera's President and Chief Executive Officer; Greg Blunden, Emera's Chief Financial Officer; and other members of the Emera management team. Before we begin, I will take a moment to advise you that this morning's discussion will include forward-looking information, which is subject to the cautionary statements contained on the supporting slides. Today's discussion and presentation will also include references to non-GAAP financial measures. You should refer to the appendix for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure. And now, I'll turn things over to Scott Balfour.

Thanks, Scott, and good morning everyone. This morning we reported fourth quarter adjusted earnings per share of $0.60 and full year 2019 adjusted earnings per share of $2.59. While consolidated results are down compared to last year, the core of our business, our portfolio of regulated utilities remained strong and performed very well, delivering adjusted earnings growth of 10% for the year. We're very pleased with this level of growth, which was primarily driven by strong earnings from Tampa Electric and our gas utilities. And similar to our Q3 results, the financial results for 2019 were weaker due to four main factors. Two of those factors were expected: the loss of earnings contributions from our merchant gas plants that we sold in the first quarter of 2019 and the non-recurring tax benefits we recorded in the third quarter last year. The other two factors were the impacts of Hurricane Dorian and unfavorable market conditions negatively impacting Emera Energy's marketing and trading operations. Collectively, the earnings impact of these four items outweighed the growth and our utilities for the year. Emera’s portfolio of regulated utilities continues to be the primary driver of our growth and the underlying performance of these businesses is delivering strong earnings growth consistent with our expectations. The contributions from our portfolio of utilities has been steadily and predictably growing through both ongoing rate-based investments and through greenfield investments like the Maritime Link and Labrador Island Link projects. Over the past six years, we've grown contributions from our portfolio of regulated utilities by an average annual earnings growth rate of 11%. Growth has been achieved by making smart investments in fuel to assets and OMG and to assets opportunities by disciplined O&M management and by working constructively with our regulators and customer groups, all helping to avoid putting pressure on customer rates over the same period. With over 95% of our earnings now coming from our regulated operations, the overall quality and predictability of earnings and cash flow has improved. And the continued execution of our strategy, making investments to provide cleaner and more reliable energy to our customers while ensuring the energy remains affordable, we'll continue to drive our growth looking forward. And a strategic reallocation of capital to our strongest and fastest growing businesses strengthens our asset base and further improves our growth profile. On our third quarter call, I highlighted the impact of Hurricane Dorian and Grand Bahama Power Company. I'm pleased to say that despite significant damage from this storm, our operations have rebounded well. Currently, GBPC reconnected all homes that can safely receive power, which represents 17,800 customers as compared to 19,300 prior to the storm. Commercial and residential customers that are not ready to receive power have had serious building damage, primarily due to flooding and require extensive renovations. It's expected that most of these remaining customers will be connected over the next two years. Currently, this loss of customers represents approximately 13% of the pre-storm load. Our team has been working with the regulator and have developed a recovery plan for storm costs from customers over the course of the five-year period. And finally, we continue to work with the insurers on property and business interruption claims that we anticipate will be resolved in the first half of 2020. The sale of Emera Maine is an important piece of our funding plan. And to date we have received all required approvals except for the approval by the Maine Public Utilities Commission. Our team has been working with ENMAX and the various stakeholders in the state of Maine to finalize this approval. A stipulation was filed with the commission in December, which contains a settlement and has the support of ENMAX, Emera Maine and a number of interveners, including the office of the public advocate. Currently, the commission is working to review this stipulation. We remain confident that stipulation meets the net benefit test in the state and we look forward to closing this transaction in the coming month or two. And so, of course, looking forward, we do not expect to have earnings contributions from Emera Maine beyond Q1 of 2020. Emera Maine contributed US$27 million in the last three quarters of 2019. This creates a period of transition as we redeploy capital into our continuing businesses to replace the lost earnings contributions from the asset sales. Reallocating our capital to prudently address customer – changing customer needs, better positions Emera to balance ongoing rate based improvements with long-term returns. On February 25, we'll be hosting our Investor Day in Tampa, Florida. As you know, 55% of Emera’s rate base is now in the state of Florida and that proportion is expected to grow, given Tampa Electric and Peoples Gas account for nearly 70% of our planned capital investments over the next three years. We look forward to our investor events as it's a way for us to show our strategy and action. This event also gives people the opportunity to interact with other members of our team from across multiple affiliates. The day will include presentations from our management team at Tampa Electric, Nova Scotia Power, Peoples Gas and New Mexico Gas. Greg and I will give Emera updates and discuss company priorities as we look ahead over the forecast period. These presentations will be available by webcast if you're not able to attend in person. Following the presentations, we'll have site tours of the Big Bend Modernization project and Big Bend Solar and Energy storage site. Our regulated utility business continues to perform extremely well. And as I reflect on the performance for the year, I'm pleased with the growth we've delivered for our shareholders. 2019 was an important year for our business as we made difficult but important decisions and then executed on those decisions to better position Emera for the future. In the first quarter of 2019, we completed the sale of the merchant gas plants and used the proceeds to delever our balance sheet by repaying debt at the holdco level. We also made significant progress on the sale of Emera Maine to ENMAX. In addition, we refreshed our capital forecast from 2020 to 2022. Our baseline capital forecast of $6.9 billion reflects several opportunities to deliver on our strategy to continue to reduce our carbon footprint and increase reliability across our regulated businesses. In addition to the $6.9 billion capital program, our teams continue to advance development opportunities of approximately $1.5 billion to $1 billion. Excluding the development opportunities, we're forecasting over 7% growth in rate base between 2020 and 2022, which will position Emera for long-term earnings growth. We look forward to discussing this and our development opportunities in greater detail at our Investor Day in Tampa in the next week. Finally, all of our regulated companies have made significant progress on their strategic initiatives. Most notably, Tampa Electric now has 520 megawatts of solar installed, mostly as part of the solar wave one and has received major milestones on the Big Bend Modernization project. These two projects will fundamentally change generation mix of Tampa Electric and provide cleaner and more cost effective energy to customers. Overall, our portfolio contained some of the highest quality regulated utilities in North America and our proven strategy, which is rooted in the transition of our portfolio from higher to lower carbon energy, is particularly relevant today as we see increased global focus on de-carbonization. As I look at growth opportunities in front of us, I'm confident that we will continue to deliver the competitive long-term system and rate-based improvements and earnings growth that our customers and shareholders have come to expect. And with that, I'll turn it over to Greg to take you through our financial results.

Thank you, Scott, and thank you all for joining us this morning. As Scott referenced, our 2019 results were impacted by the sale of our merchant gas plants, Hurricane Dorian and weaker marketing and trading conditions. However, we continue to be very pleased with the earnings growth that is being delivered from a regulated portfolio. As I’ll walk you through in a moment, strong growth from regulated utilities has fully offset the earnings impact of the sale of our gas plants and we expect our regulated earnings to continue to grow in 2020. This growth combined with the opportunities identified in our new capital program reinforces our confidence that we will continue to deliver long-term earnings growth to our shareholders. While the growth in our regulated earnings was significant for the year, this growth did not offset the impacts of Hurricane Dorian and weaker marketing and trading conditions. As a result, we experienced lower annual adjusted earnings per share than 2018. Without those these negative impacts, adjusted earnings per share for 2019 would have been consistent with the normalizing 2018 results despite the sale of our gas plants in Q1. And now let's get into the details about the quarter. In the fourth quarter of 2018, Emera delivered adjusted earnings per share of $0.71, or $0.62 on a normalized basis. Growth from the normalized 2018 base of $0.62 was largely driven by very strong performances by the Canadian electric utilities and the gas utilities. During the quarter, Nova Scotia Power and Maritime Link contributed $58 million of earnings, an increase of $11 million for the fourth quarter of 2018. Growth in the quarter was driven by increased income from our equity investments in the Maritime Link and Labrador Island Link, decreased income taxes and lower non-current service pension costs. Earnings growth in the gas utilities and infrastructure segment was largely driven by favorable weather in New Mexico, customer growth of Peoples Gas and lower depreciation and amortization of Peoples Gas. The Q4 results like Q3 were impacted by Hurricane Dorian with earnings being negatively impacted by $12 million or $0.05 per share for the quarter. Fourth quarter earnings from Emera Energy's Marketing and Trading business were CAD 6 million lower than Q4 2018 or $0.03 per share. And the Q4 2019 earnings contribution from Tampa Electric was down US$3 million, or $0.02 per share compared to Q4 2018 due to unfavorable weather. Drivers for the year-to-date period are largely consistent with the quarter with strong growth in the U.S. utilities being largely offset by lower marketing and trading margins and the earnings impact of Hurricane Dorian. Year-to-date Tampa Electric increased earnings by US$22 million. This increase is from higher base revenues related to in-service solar generation and customer growth. These increases were partially offset by higher depreciation and interest expense as a result of capital investments. For Emera's gas utilities, recall that both Peoples Gas and New Mexico Gas had strong years with earnings increases of US$19 million after removing the US$14 million of impacts for one-time items related to New Mexico's Gas recognition of tax benefits New Mexico’s results benefited from favorable weather and incremental earnings from an asset management agreement. And the Peoples Gas earnings benefited from lower depreciation rates and increased earnings related to ongoing Cast Iron/Bare Steel replacement investments. Our Canadian utilities experienced a 2019 with an increase in adjusted net income of $11 million. This growth was primarily driven by increased investments in both Maritime Link and Labrador Island Link, higher non-fuel revenues, timing of deferrals, lower non-current pension costs and lower income taxes. And as I previously discussed, Emera Energy experienced difficult marketing and trading conditions in Q2 and Q3 of this year. For the year-to-date period, marketing and trading returned to profitability with earnings of CAD 5 million for the year. The impacts of Hurricane Dorian continued into Q4, due to loss load in the corporate share of unrecoverable losses, Emera’s earnings were negatively impacted by CAD 28 million or $0.12 for the year. It should be noted that Emera also recorded a goodwill impairment charge of $34 million related to Grand Bahama Power Company against reported net income, but not the adjusted net income. The charge was taken due to a decrease in expected future cash flows resulting from the impact of Hurricane Dorian’s storm recovery. Consistent with previous years, share dilution had an impact on adjusted EPS as Emera has continued participation in the dividend reinvestment plan and the after-market equity program. In 2019, approximately 8 million common shares were issued through these plans and programs. Year-over-year the EBITDA, earnings before interest, taxes, depreciation and amortization was consistent, decreasing by $33 million or 1%. Operating cash flow before working capital for 2019 was down $208 million compared to 2018. The sale of merchant gas plants caused $92 million of the decrease. The remaining difference related to Hurricane Dorian, timing of AMT credit payments and lower marketing and trading margins. Partially offsetting these decreases was the growth in our operating cash flow from our regulated businesses, which grew by 6% as compared to 2018. This growth was led by Tampa Electric, which grew cash flows by $88 million for a 10% increase year-over-year, this increase in the regulated operating cash flows are a signal of the improving quality of our cash flows, which remains a priority for our team. And with that, I'll turn the presentation back over to Scott.

Thank you, Greg. This concludes the presentation. We would now like to open the call for questions from analysts.

[Operator Instructions] First question comes from the line of Ben Pham [BMO Capital Markets]. Please go ahead.

Hi. Thanks. Good morning. Just one of your slides, you highlight – it looks like your utility businesses, good growth. You look at normalizing all the adjustments you've seen during the quarter. So my question is, I mean, I guess, it's a good point to highlight from various standpoint. But when you guys look at calculating EPS trajectory and your payout ratios and whatnot and the targets. Are you guys taking that same approach, where you're just mostly looking at the utility business, ignoring Emera Energy trading, which could be volatile every year?

Ben, it’s Scott. Let me take a crack and Greg can add on. I mean, look, I mean, of course, we're looking at our consolidated adjusted EPS and EPS growth. But what we're wanting to highlight as we go through this transition is of course with a lots of contributions from the merchant gas fleet and then prospectively from Emera Maine. Really just trying to highlight what's going on within the core and continuing business profile is, you know, these businesses are performing really well and delivering growth. And yes, Emera Energy will – the marketing and trading operation will continue to have some volatility to it. I would highlight, of course, it's a small portion of the overall $2.5 billion, $2.4 billion of EBITDA that this business generates. So if you look at that sort of core portfolio of regulated utilities, which represents 95% of the going forward business. Those businesses are driving strong growth year-over-year. They have been for some time and we expect that will continue to be the case in the future.

And Ben, this is Greg. The only thing I would add to that is maybe to try to address your specific question, when we target a dividend payout ratio and growth over time, we would, in our long-term forecast, expect Emera Energy and the marketing and trading side of the business to deliver that $15 million to $30 million on an annualized basis, recognizing that there'll be years where we'll be above that range, midpoint of that range, and there'll be years where we'll be below it, similar to 2019.

Okay. All right. And can you remind us the development opportunity, that $0.5 billion to $1 billion, what's in that? And maybe just a refresh on the time line and the storm hardening?

Yes, Ben, we'll give some deeper color to that at Investor but it's continuing to include the same theme of things that we've talked about before, as we continue to refine expectations around things like more solar investments in Florida, things like storm hardening, as that becomes clearer, continued cleaning of the generation fleet in Nova Scotia Powers, we worked on some refurbishment of hydro-related resources. So those kinds of things, all form part of that, but we'll give some more color to that at Investor Day.

All right. Sounds good. And good timing on the capacity payment, just swapping out of that. Thanks a lot.

Thanks Ben.

Next question comes from Linda Ezergailis with TD Securities.

Thank you. I am wondering if you could just give us a sense, just further to Ben's question about storm hardening and your capital. I know you're going to be providing some more disclosure at your Investor Day, but in Canada, the CSA is looking at implementing some more resiliency standards. And I'm wondering if, given your recent experience with Nova Scotia Power, if that might suggest some opportunities to further storm-harden that utility? Or if that is already kind of as resilient as it can get, given the Maritime geography?

So I'll start and Wayne, feel free to add in, it's helpful. So look, I'd say making reliability investments, every utility is focused on that, including ours, of course, including Nova Scotia Power, of course, the topography, the geology in Nova Scotia means undergrounding system here is very difficult and very expensive. But a significant amount of effort has gone in by Nova Scotia Power over the last number of years to continue to storm-harden the system as what we're seeing is increases in wind speeds, sequence peaks, more frequently. And so the team continues to work to ensure the system is improving its reliability as we continue to respond to what we're seeing is, at times where winds are stronger more frequently than they used to be. And so a good part of Nova Scotia Power's maintenance and capital program is focused on that. Wayne, anything you'd like that? Wayne O’Connor: Linda, I just would say that – a couple of things. So reliability, obviously, is pretty important to us and our customers. So we continue to look at ways to improve that. So as Scott has highlighted, we've been doing that for quite some time and continue to look for new ways to do that. So we've been engaged with customers and the regulators here on some more innovative projects and pilot projects that allow us to test out things like micro grids and batteries. So we do see that as a growing opportunity for us going into the future as we look to improve upon the liability and make the grid more resilient.

Thank you. And just some follow-up, maybe on your Q4 results, specifically in 2019. Maybe you could just give us an update on your thinking about long-term outlook and benefits related to your Marketing and Trading business? I know historically, there was a view that it provided kind of strategic and industry insights that kind of punched above the weight of the – beyond the direct contribution. But now that you've sold your gas plants and given some of the volatility and softness we're seeing, I'm wondering if you're thinking about changing the scope of what you do there or the strategy or if you expect it to see it continuing for the foreseeable future?

Linda it's Judy. So the Marketing and Trading business existed for 10 years before we owned the gas plants. So it's kind of raise on debt to Emera has been around for a lot longer than that five-year term. If you kind of look and see – it operates within its earnings range, generally, of 15 to 30. And if you kind of look over the last several years, the average is around 28 or 29, which is very close to top end of that range. 2019 was a hard year for it, but that was frankly more unusual than normal circumstances. We still think there's opportunity in that business, and our goal continues to be to manage it with an appropriate downside risk and be there on the – for the times when it can provide us with upsized returns.

Okay, and then maybe just a quick question on your New Mexico Gas business. Can you comment on the biggest changes in your regulatory application? And where you expect most of the discussion to be as it goes through the regulatory process.

So yes, Linda, I don't think Ryan is on. If so, Ryan, feel free to speak up. But this will be the second rate case that we filed in New Mexico since we acquired New Mexico Gas. The first rate case, which – was seeking a modest increase in revenue, but also seeking a weather tracker, if you will, where in New Mexico it's principally a winter-based system, providing gas for home heating. But the winter season can be quite short, and so that first application successfully, on a period trial basis, brought in place a weather tracking system that we think is constructive for customers, but also important for the utility. The second rate case is really just catching up to some of the capital investment initiatives that are going on in the system. In New Mexico, adding the resiliency of that system, improving the integrity of that system. And so seeking additional revenues in order to support that capital investment that – and this rate case is being done on a forward test- year basis, this will be the first forward-test year basis for New Mexico rate application.

Thank you.

Next question comes from Robert Kwan with RBC Capital Markets.

Good morning. If I can just turn to Slide 13, you provided the normalized 2018 number, and you've shown the waterfall to 2019. I'm just wondering, what would that normalized number for 2019 will look like when you think about energy services in Dorian, which you've outlined, but as well as things like NMGC, weather and some of the regulatory, I guess, just as well, if you can comment on do you have what the earned ROEs at the utilities were for 2019?

Robert, it's Greg. On Slide 13, if you took the $259 million and adjusted to a midpoint for Marketing and Trading and Hurricane Dorian, you'd effectively get back to the $278 million level that we would've had in 2018. So it's really those two items that would have been the difference between what we reported in 2018. Remember, absent that Florida tax adjustment and what we realized in 2019. Obviously, there wasn't a lot of other differences through the individual line items. But for the most part, it's a result of that. In terms of ROEs, NSPI had an ROE towards the top end of their band, very consistent with what they had over the last number of years at around 9.25%. Tampa Electric and Peoples Gas were both kind of in and around the 10.25% to 10.5% ROE. New Mexico, I was 9%, 10%. I'd have to get back to you, Robert, on New Mexico. I think New Mexico was kind of in the high 9s last year, but I'd have to get back to you on that to confirm the exact number.

Okay. And I guess, just on that though, for PGS, how far below do you expect PGS to be for 2020?

It will be somewhat weather-dependent, Robert. But it won't be – I wouldn't expect to be too materially below the low end of the band.

Okay, but obviously enough to file the rate case?

Yes, we don’t need to be below the band to file for rates, but we do need rates for 2021. And as you would expect, in particular, in state of Florida as you get a year out from requiring rates, you generally have a degradation of your ROE, and that's what we're seeing. But regardless of what we would expect to receive in 2020 with open rates, that number would be lower in 2021.

Got it. If I can just finish with sustainability or ESG-related topics. You talked about – a lot about that within your presentation, things that you're doing. I'm just wondering, how do you think about your gas distribution businesses? Whether that's just the way the market's viewing gas distribution? Or more long term, the existential risk to those businesses?

Yes, Robert. It’s a good question and one that we're mindful about. I will say, certainly today in both the state of Florida and New Mexico, both the state and ourselves, in many ways, see the gas LDC as an enabler to the continued electrification and decarbonization of the electricity sector in those states. And so we know that this is a growing topic, but the reality is that the natural gas is demanded by our customers in those states, it's seen as a cleaner, affordable fuel, there's a high-efficiency factor, of course, of that supply direct to the customer. And so at this point, as I say, we see those LDCs as enabling the decarbonization of the electricity sector. But of course, we're paying attention to what's going on in other markets. But right now, I think we're in a good place in both New Mexico and Florida.

It’s great. Thank you very much.

Next question comes from Andrew Kuske with Credit Suisse.

Thank you, good morning. What are your expectations around getting your block power off of Muskrat Falls for later in 2020?

Yes, so we continue to expect that we'll see the Muskrat Falls projects commissioned and delivering energy for us in mid-2020. And so our – as we see it, we continue to be sort of tracking all of our expectations for Nova Scotia Power, consistent, of course, with [indiscernible] representations as well. So mid-2020.

Appreciate that. And then how much headroom does that give you on multiple fronts and effectively lowering fuel costs in Nova Scotia for ratepayers, the emissions profile and really transitioning out of the pet coke, the oil and then the coal?

Yes, So clearly, Maritime Link has long been an important part of Nova Scotia Power's journey to reduce its coal-related generation, but particularly to reduce its carbon emissions. We'll be with benefit of Muskrat at Muskrat energy once that starts to be delivered at 40% renewable in Nova Scotia Power, and it's almost 60% non-emitting. And so when you think about that in the context of the COP21 objectives and goals that were set, which was a 60% reduction by 2030, the journey for Nova Scotia has been a really good one. And so we would expect to see sort of on a full year basis in 2021, 40% renewable and 60% non-emitting, which is great progress for the province of Nova Scotia.

Great thank you, one final one. Just on expectations around the northern pulp mill. Do you see any impact on just regional load dynamics? Wayne O’Connor: So Northern Pulp as you know is – in the longer running, the dynamics probably more are on the pulp and paper industry as compared to our overall load or generation. So it's probably more keenly felt in that sector. We have a biomass facility in Port Hawkesbury that can burn more wood, if we can get it at the right price. So that's probably the biggest impact less to our overall load on an annual basis.

Okay, that is great, thank you.

[Operator Instructions] We have question from Julien Dumoulin-Smith with Bank of America.

Good morning guys. This is actually Ryan Greenwald on for Julian. Just kind of curious how you guys are framing EPS growth for 2020, kind of given the discrete headwinds that emerged in the back half of the year, any color you guys can kind of provide there?

Hi Ryan, it's Greg. As you're probably aware, we don't provide earnings or EPS growth targets or guidance. What we have provided is a three year capital plan that has a rate base growing by roughly 7%, and we would expect all things being equal over that planning period, EPS growth would approximate that.

Fair enough and then I guess, how are you guys kind of thinking about your ability to earn authorized returns in the outer years as you guys kind of go in for rate cases in the key subsidiaries here in Florida?

Ryan, it's Greg again. I mean, what has been our experiences as you have – the year leading up to or the years leading up to the need for rates that you often see some degradation. Generally, our experience is once you come out of giving new rates set that we would have an expectation to be at the midpoint or slightly higher than that over that period of time until, again, you really have to go back in for rates and it starts degradation.

Got it. And then lastly as you guys kind of think about your rate base predominantly being in Florida and ahead of the Analyst Day down there next week, just kind of curious on your latest thoughts of potential for a possible U.S. listing?

Yes, Ryan I don’t think anything's changed. When we think of what the benefits and costs are with the U.S. listing, we don't certainly see that there is a material valuation gap between where we think we would trade if we were dual-listed versus just Canada. And we reached that conclusion by looking at some of our peers that are listed in both countries. We don't feel like we have any kind of restrictions on access to capital or anything like that. So we'll continually monitor. But right now, it's not something that's a priority for us.

Got it. Thanks for the time.

Thanks Ryan.

[Operator Instructions] And we do not have any telephone questions at this time. I will turn the call over to the presenters.

Well, thank you for attending the Q4 2019 Emera call. If you have follow-up questions, please feel free to reach out.

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