Q3 2021 Emera Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the American water three 2021 analyst conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, David <unk>. Please go ahead.
Thank you Alicia and thank you all for joining US this morning for Amira as third quarter 2021 conference call and live webcast Amir.
Mirrors third quarter earnings release was distributed this morning by newswire and the financial statements management's discussion and analysis and the presentation being referenced on this call are available on our website at Amira Dot com.
Joining me for this morning's call are Scott Balfour mirrors, President and Chief Executive Officer, Greg Blunden mirrors, Chief Financial Officer, and other members of <unk> 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 statement contained in the supporting slide.
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 will turn things over to Scott.
Thank you, Dave and good morning, everyone.
This morning, we released our third quarter results and I'm pleased to say, we continue to deliver steady predictable growth.
Our third quarter adjusted earnings per share was <unk> 68 compared to 67.
In Q3 of 2020.
When you adjust for the timing of preferred share dividends to make it an apples to apples comparison, our adjusted earnings increased by 10% compared to the same quarter last year.
And for the year to date, we've delivered 12% adjusted earnings per share growth from $1 93 per share for the first nine months of 2020 to $2 17 per share for the same period in 2021, even in a strengthening Canadian dollar environment.
This growth reflects the overall strength of our business underpinned by our regulated utilities Conor.
Contributions from our regulated businesses have been increasing as we continued to advance our strategy by making great base investments to reduce carbon emissions and improve reliability, while never losing sight of affordability for customers.
As you know the rate based investments, we're making on behalf of our customers and execution of our strategy to safely deliver cleaner reliable and affordable energy also drives our earnings and cash flow growth.
This year the foundation of our capital program has been our major project investment to Tampa electric, including the Big Bend modernization project and the second phase of our solar program.
We've also continued to make investments across the portfolio to decarbonize to increase infrastructure resiliency and to provide our customers with more choice and control, including the deployment of smart meter technology.
With 70% of our expected 2021 spend completed at the end of the third quarter, we remain on track to make over $2 billion of rate base investments in 2021, all while keeping our teams safe and our capital projects on time and on budget.
De carbonization has been central to <unk> strategy for over 15 years, and now as policymakers stakeholders and customers continue to increase their focus on reducing carbon emissions and mirror is as well positioned as ever to deliver growth and value for our customers communities and shareholders.
Our decarbonization journey began here in Nova Scotia.
Over the last decade, Nova Scotia power has tripled the amount of renewable energy it delivers to customers and reduced its <unk> emissions by more than 30%.
Nova Scotia power is on track to deliver nearly 60% of its energy from renewable sources in 2022.
And in August we reached another important milestone in our de Carbonization journey, when hydro energy from Muskrat falls began flowing to Nova Scotia through the Maritime link.
Having access to this source of clean energy will allow us to continue reducing the carbon intensity of our generation fleet and keeps us on track to meet the province of Nova Scotia's renewable energy targets.
Last month, the Nova Scotia Provincial government introduced climate commitment legislation that included the retirement of coal generation assets and supply of 80% renewable energy by 2030.
Meeting these targets will require incremental investment in cleaner energy solutions storage and transmission as well as alignment between regional utilities and provincial and federal policymakers.
The team continues to advance discussions with stakeholders on next steps to achieving our shared goal of transitioning to cleaner energy in Nova Scotia by 2030.
The eastern clean energy initiative.
A new transmission component of which is referred to as the Atlantic loop represents a significant opportunity to work collaboratively with our neighboring utilities in eastern Canada and various levels of government to facilitate the transition off coal at an accelerated pace without undue rate impacts for our customers.
In addition to new transmission capacity.
This initiative includes investments in renewable sources, particularly wind as well as transmission infrastructure upgrades and investments in battery storage all to replace the energy and critical capacity that Nova Scotia Power's coal plants provide today.
We continue to be encouraged by our ongoing discussions and hope to be in a position to provide a more clear sense of the significant project in early 2022.
Earlier, this week Tampa electric announced their vision for cleaner energy future aligning with a mirrored climate commitment announced earlier this year.
Since the year 2000, and Tampa electric has reduced coal usage by more than 90% and cut C O two emissions in half.
Even while demand for power has increased 25%.
In addition to net zero vision by 2050, Tampa Electric announced a series of interim goals that it will target on the journey to cleaner energy, including a 60% cotr emissions reduction by 2025, and an 80% reduction by 2040 <unk> relative to their year 2000 levels.
It's been a busy year for us on the regulatory front.
Most recently, the Nova Scotia power Maritime link team filed the final project capital cost application with the <unk> in Nova Scotia.
And in the Caribbean, both Barbados light <unk> power and grabbed Bahama power recently filed rate cases.
We expect to have final decisions on all of these matters in early 2022 or before.
Achieving successful and balanced regulatory outcomes is critical to our success.
We've consistently demonstrated our ability to secure fair and reasonable decision decisions across the business with rate case settlements over the last year at New Mexico gas peoples gas and most recently at Tampa Electric.
Last month, Tampa Electric's uncontested settlement agreement was unanimously approved by the Florida Public Service Commission.
This settlement represents a balanced agreement that supports our strategy to provide Tampa electric customers with affordable cleaner and more reliable energy.
Even with these new rates coming into effect on January one 2022, Tampa electric rates are expected to continue to be among the lowest in Florida and about 15% below the current national average.
These new rates not only support investments already made to decarbonize the generation mix, but provide full support for the completion of the big Bend modernization and the second wave of new solar generation, while also providing a mechanism to recover the costs associated with the accelerated retirement of coal generation.
Before I pass the call to Greg I want to take the opportunity to update you on some upcoming leadership changes at peoples gas.
T J Sam Suski is retiring this December after 42 years with the company.
42 years.
I know that sounds hard to believe but he joined the company as a co op students back and $19 78.
And as President of peoples gas since the acquisition of Teco since our acquisition of Tico T. J has been instrumental in driving the utilities' growth, it's strong safety performance and its outstanding customer service.
Helen Wesley will be appointed as the next president of peoples gas on December one when T J retires.
Helen joined our team last year as the Chief operating officer at peoples gas she.
She is a dynamic leader, who will build on the growth and momentum at peoples gas as the team continues to deliver for customers in Florida.
Thank you T J and congratulation tallow.
And with that I'll pass it over to Greg.
Thank you Scott and thank you all for joining us today.
This morning, we reported third quarter adjusted earnings of $175 million and adjusted earnings per share of <unk> 68, compared to $166 million and <unk> 67 in Q3 of 2020.
For the nine months year to date adjusted earnings were $555 million and adjusted earnings per share was $2 17.
Compared to $477 million and $1 93 for year to date 2020.
<unk> adjusted earnings per share increased for the quarter and year to date, despite foreign exchange headwinds of <unk> and <unk> 11, respectively.
Our adjusted earnings exclude Mark to market adjustments Mirror Energy's Q3, Mark to market loss had a very material impact on reported earnings I gave you a refresher on that situation in Q2, and I will deliver a condensed version now as a reminder.
The mirror energy has deals with utilities and producers to buy or sell gas for a term that comes with the release of the customer's transport.
Mark to market arises on the price difference between where the gas to source and where it is sold which was fully offset by the value of the corresponding gas transportation asset.
But because the gas is mark to market in the transportation asset is not that resulted in some net mark to market gains or losses recorded in income.
In Q3, the magnitude of the mark to market losses, particularly high because prices have surged in emera Energy's primary sales market, New England LNG.
LNG is a marginal fuel there in winter in global LNG prices are high.
As always it is important to emphasize that these situations have no actual economic market exposure, because regardless of the difference in the value of the gas between the receipt and delivery points Amira energy has a transportation capacity that enables us to move the gas to the point at which it is priced.
It will take you through now growth in adjusted earnings per share was primarily driven by steady growth in our core regulated utilities, lower corporate costs and improve earnings and our marketing and trading business, partially offset by foreign exchange and a higher share count.
Although third quarter results are flat relative to 2020, when you adjust Q3 2020 for the preferred share dividend that would have normally occurred in that quarter earnings per share increased by <unk> over Q3 2020.
This increase is a result of our portfolio of businesses that performed well in the quarter.
Our gas utilities led by peoples gas continues to benefit from new rates and continued growth in its customer base, excluding the impact of a stronger Canadian dollar peoples gas delivered $10 million Canadian of increase earnings compared to Q3 2020.
The mirror Energy's marketing and trading net earnings increased $7 million to the strength in market pricing and higher volatility.
Our Canadian utilities contributed modestly to growth in the third quarter with a higher contribution from Nova Scotia power due primarily to lower income tax expense.
And excluding the impact of foreign exchange higher AFDC earnings increase the contribution from Tampa Electric as we continued to invest in our big Bend modernization and solar projects.
This was partially offset by higher depreciation and amortization expense, reflecting increased capital investment and the effect of the 2020 amortization settlement in Q3 of last year.
Growth from these businesses was partially offset by the timing of the preferred share dividend in 2020, a stronger Canadian dollar and a higher share count.
We continue to proactively manage our exposure to the strengthening Canadian dollar through economic foreign exchange hedges.
In Q3, we recognized $4 million in realized gains on these hedges and entered into additional FX forwards.
For the remainder of 2021, we had $56 million in hedges at an average rate of approximately $1 35.
Similar to the quarter the year to date increase in adjusted earnings per share of <unk> 24 cents was driven largely by higher earnings at a mirror energy due to favorable market conditions as well as strong results from our gas utilities due to new rates and continued customer growth.
Our corporate segment benefited from $29 million of lower interest expense, primarily due to the retirement of corporate debt lower interest rates and the strengthening Canadian dollar and.
And realized gains on foreign exchange hedges contributed $17 million of the increase over prior year muting the impact of foreign exchange headwinds from our U S operations.
And increases in our Canadian and Florida Electric segments were consistent with the factors that impacted the quarter as discussed a moment ago.
Foreign exchange impacts share dilution and the sale of a mirror, Maine, partially offset the growth from our core operations.
Operating cash flow year to date is down $66 million or 6% compared to 2020, primarily as a result of incremental fuel costs associated with winter storm Yuri at New Mexico gas.
And cash flow to regulate utilities has been negatively impact by the increasing commodity prices. We are seeing around the world in particular natural gas prices, which have increased two fold since January one.
Although our cash flow results currently reflect the impact of the higher fuel cost incurred across the business. There are regulatory mechanisms in place to recover these prudently incurred costs from customers.
And while there is no impact on our earnings it's important that the timing of cash flow recovery is actively managed by working with our regulators to balance affordability for our customers.
The most recent evidence of this was a regulatory approval in new Mexico to defer the cost of winter storm, Yuri and collected over a 30 month period beginning on July one of this year. This ensured customers were not overly burden and shareholder interests are protected.
Now before I turn the presentation back over to Dave I would like to mention that at our upcoming Investor Day on December one we look forward to walking you through our new three year capital forecast updating you on our key strategic initiatives and introducing some of our leadership team. Although we wish we could connect in person we have decided in the interest of safety to move forward with a virtual event for <unk>.
2021.
And with that I'll turn it back over to David.
Thank you Greg. This concludes the presentation, we would now like to open the call for questions from analysts.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Maurice Choy RBC capital markets.
Thank you and good morning.
My first question.
As it relates to a topic you mentioned Scott you mentioned that.
Got you to move to Decarbonize, Nova Scotia, you're encouraged by the ongoing discussions with the potential update in early 2022.
Given that we've got.
The federal and provincial government support.
Especially given recent elections on both sides can you provide some color on where if any pushback caught me is that you see elements of the Atlantic loop, and a 2030 off coal and Nova Scotia, where you see elements of that.
Out of your plan next month.
Yeah, great. Thanks, Thanks for the question Peter.
Peter Greg's here with me and he can contribute to this too but broadly.
I don't think were really seeing any resistance to this really.
The idea of this of this project around looking to optimize the energy resources.
Existing our neighboring provinces to help Nova Scotia, and New Brunswick frankly, both.
To decarbonize.
A lot of this is around the.
The effort to do it on a basis that doesn't sacrifice affordability for customers.
So with that it's about aligning.
All the all the parties involved in this a number of provincial governments, the number of provincial utilities and of course, the federal government.
Way that it has the.
Benefits to all of those all of those parties and so part of it is really as is.
Looking for support from the federal government in order to assist in this in a fair way for Nova Scotia, where.
Today.
The cost to retire the remaining coal plants in Canada, 55% of that in Nova Scotia, where we only have 3% of the population and so.
Looking for federal government to help with this too insurance affordable and frankly, I don't think it says anything about resistance at this point, it's just really complicated and takes time to work through in the meantime, Nova Scotia power.
Is working its own plan in terms of things that needs to be done within its own system.
Here with investments as I mentioned in.
New renewable resources, and wind and storage and transmission upgrades will all be part of that as well and will form part of Nova Scotia Power's capital plan over the over the years to come Peter anything you'd like to have that Scott and thank you Sir.
Hi, Bob.
Thank you just maybe reemphasize that I think since we've had the provincial election federal election, I think I agree with Scott there is alignment with the alignment of a 2030 goal for decarbonization.
Good support for our plan that we've put forward, particularly with the provincial government.
So I think there is alignment amongst many parties, but as Scott said with many parties involved.
Complexity.
So, but but continued positive momentum.
Yes.
Great and.
Maybe my second question I, just wanted to pick up on your decision to extend your.
Dividend growth rate to.
By two years to 2024.
At the same time in your MD&A, you mentioned that you continue to see the payout ratio to be above that target rate target range of 70% to 75%.
Given it now and you have the Tampa electric rate case approved how does that approval improved your ability to maybe if visibility and getting back to your target payout ratio.
Yeah. This is Greg.
I'd say it was pretty much the settlement was pretty much in line with what our expectation would have been and so we'll see we believe a meaningful improvement in our payout ratio over the next couple of years, but we still would expect that will likely not get into the sweet spot of the 70 to 75.
Until sometime after 'twenty three or 'twenty four.
Assuming the Canadian dollar stays at these levels and we don't see a material weakness in the Canadian dollar over that period.
Great. Thank you.
Youre welcome.
Your next question comes from the line of Ben.
BMO.
Alright, Thanks, good morning going back to Atlantic Lou are you.
Table, two I noticed there's still probably a lot of.
Items you need to.
When you get turned down probably frame.
Frame it may it from that perspective Maritime link.
Size and timing.
Just to maybe frame it.
Ross.
So I'm trying to gauge capex and timing and whatnot.
Yes, Ben.
I understand the question and obviously, we'd love to be able to to do that the challenge right. Now of course, it's until there's more clarity as to the the roll that all those parties are going to play we've just been hesitant to.
To lock in and set expectations around what it means from a from a capital cost perspective, that's relevant for Nova Scotia power and Amira.
I do I do know, there's a number one in the media of roughly a $5 billion.
Project in <unk>.
Magnitude, that's obviously about right, but looking as to what the component part of that is for Nova Scotia power and therefore, the capex and investment profile for Nova Scotia power and a mirror. It's just it's still too soon to tell.
Look at those numbers and that's why I say, we're hoping that in early 2022. Once we've got more clarity on all of this has to with all the parties are that will be in a position to provide more clarity then.
Okay.
Pat.
On the balance sheet.
You had mentioned.
Maybe a sweet spot in the payout ratio and you've also mentioned hitting the credit metrics next year.
When you do reach their 2022.
Do you have a preference for staying in that range as you add capex are you considering.
Considering I think about my aggregated bought portfolios credit metrics over time.
Yeah, Ben Good morning, it's Greg.
I mean first and foremost what we've been focused on is getting our balance sheet to our targeted capital structure and getting our credit metrics to the 12% <unk> and CFO to debt and have them at a level that's sustainable over the long term that doesn't mean that we're going to stop there.
But we you know as we see the growth in the business beyond 2022, we think they'll be inevitably a buffer built into it but most importantly for us is to get to those threshold levels in.
The meta point, where they are sustainable over the longer term.
Okay. That's great. Thank you very much.
Thanks Ben.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone.
Your next question comes from the line of Rob Hope Scotiabank.
Good morning, everyone. Another question on the Atlantic live projects, it looks like a nice solution to phase out coal but.
Long term our long distance transmission systems are very difficult to permit as we learned in Maine.
What would plan B B for Nova Scotia power and like do you think there are sufficient wind resources and firming resources, even possible in the province to help you meet that 2030 goal and will you have a dual track process of kind of option, a and option b in and when do you have to start engaging the regulator on that.
Okay.
Yeah, Robert It's Scott So look I mean, we're.
Where utility which means we contingency plan everything and so yes, we do have plan B C and D and so on but we believe this is the right and best plan for Nova Scotia, frankly for the region.
As a whole and look one of the one of those contingency plans could be we build more gas generation capacity.
In the province to backstop more wind, but we prefer not to do that both because that has its own carbon emitting profile of course, but also we know that the access to natural gas Atlantic Canada's is constrained so.
That's one option there are there are others ideally, creating more transmission capacity.
In order to provide in particular the incremental capacity.
Acquired to backstop more intermittent renewables the maritime link is.
It's a critical asset in.
In achieving that future, but but frankly, one more one more big extension cord as ive been describing to some investors.
Is something that.
It really makes the most sense.
Two and to achieve the off coal and 80% renewable objective for Nova Scotia power and that continues to be the focus for Peter and the team and as I say, we are encouraged were optimistic but still.
Still some lots of work to do before we're in a position to talk about it with any certainty.
I appreciate the color on.
A four part question.
So.
Peter Rob.
I think Scott said it well.
Our preferred plan, which includes the Atlantic loop.
Really is the preferred option from a from a customer affordability perspective from an achievable perspective from a reliability perspective Scott's right. We do continue.
Contingency planning mid point, you to our integrated resource plan that we published last year in spite of a regulatory requirement and so it would give you a sense of the kinds of considerations, we make as we do that long range planning.
Got that.
Thank you.
Thank you and then just a second question.
For Greg.
The commentary on higher fuel costs weighing on cash flow in 2021.
Just want to confirm that's predominantly at new Mexico. As you did have that course correction that adjustment at teco.
Sam it should be covering off most of that just trying to get a sense of.
Whether or not youre seeing are there any other kind of <unk>.
Inflationary pressures on fuel impacting cash flow that churn.
Yes, potentially and.
In later years.
No I think you have it right, Rob obviously at Nova Scotia power.
Any incremental fuel costs that we would have incurred to date.
It wouldn't get true up with customers until future periods. So that's really I was referring to Tampa electric Youre right. We had a mid course correction.
But even with that we're seeing.
We're still seeing a little bit more under recovery on fuel that will all get chewed up likely early next year and we're still working through the timing of the regulatory filing on that but but by far and away.
Our experience this year has been net new Mexico that you highlighted.
Thank you that's it for me.
Thanks, Rob.
And your final question comes from the line of Andrew Kuske of Credit Suisse.
Thanks, Good morning, I guess it starts off with Greg does even by CFO standards, you mentioned balance sheet a lot on this call and not trying to trying to be patronizing about it but you've come a long way in the last two years, but where do you ultimately want to wind down.
I'll take that as a comparable that Andrew Thank you.
So.
We're happy look you're right. We have done a lot of work we've done a lot of work with the asset sales that we completed a little over a year ago with the sale of <unk> happy with the outcome of that.
You know have continued I think very methodically raised the appropriate amount of equity through our ATM and drip programs and then of course this year, we're happy with the successful execution of a couple of preferred share offerings. So I'd say, we're happy with where the balance sheet now obviously, the last 12 months or so we've been focused on the cash flow and Thats why the <unk>.
Three rate cases, the two at our gas.
Gas utilities last year and by far and away the largest at Tampa Electric this year was a priority for US we're happy with the outcomes of all of those so I'd say.
From a from a balance sheet perspective, and a credit metric perspective, we feel like we're in pretty good shape.
But you know.
I don't want anyone if we mentioned it more than you would have expected as we don't want you to be left with the impression that it's not still an area of focus at least for me and my team because it is.
Okay. That's helpful.
Could take it as a compliment.
The dynamics that you face right now you've got as with a number of others in the industry.
A tremendous amount of growth opportunities within the rate base.
We're doing more creative things like Atlantic loop.
How do you think about the funding of that and is there a way that you could use securitization mechanisms because we've seen these in the past.
Currently in place in some areas in the U S does that sort of second to the equation as part of the funding solution.
Yes, I think at this point, it's probably premature to.
To comment on that Andrew I would say the capital in front of us and we'll be rolling that forward in a couple of weeks of for you all to have some visibility on I would say were.
It's kind of normal course business for us, it's working our way through the capital structure maximizing our operating cash flow, obviously debt at the utility level, and then preferred shares and common equity to balance that off as long as we are inside our targeted capital structure.
As we look forward, if we see a significant.
Change in our capital investment opportunities.
Things like the Atlantic loop, which again, it's a little bit premature then we'll look at all sorts of opportunities whether securitization on retiring coal plants.
We continually look at our portfolio to see if they are seeing that.
We can optimize our raising of equity in a more cost effective way, but I'd say at this point in time all of that is premature until we have a sense of what that capital profile looks like and what the funding requirements from Merrell will be.
Okay. That's great. Thank you very much.
Thanks, Andrew.
And your next question comes from the line of David Quezada of Raymond James.
Thanks. Good morning, guys just a just a quick one for me just curious your thoughts on the.
Various I guess clean energy incentives in the in the infrastructure plans are being flooded in the U S right now.
Curious how you see that evolving in terms of your Capex plan. Maybe this is preempting your investor day, a little bit, but I guess certain certain things like R&D and.
Potentially further tranches of renewables, how do you see those playing a role I guess R&D more specifically going forward.
Yes, David look I think in a way.
It was a bit what I was trying to get at in my remarks, where we've been we've been focused on decarbonising for a long time as you know.
Starting with the journey here in Nova Scotia, because Nova Scotia's.
Generation profile not that long ago is 90% very high carbon.
And emitting sources and so.
We're now in a place where we've got government policy.
It is advocating for in some cases mandating.
A faster and more accelerated pace to decarbonize and so to the extent that there is a gulf.
Government support.
For this in the form of tax credits or subsidy frankly.
It helps because one of the challenges in this is is not the ability for utilities to execute.
And even for that matter fund.
And the capital plans relating to Decarbonising, it's doing it in a way that still keeps it affordable for customers and the fact is almost being equal the faster you can do it the more it costs and so to the extent that there's there's government support through through policy initiatives that seem to be.
In focus in both both the USA and Canada, frankly, that's just at least directionally helpful. Because it allows us to execute.
And to reduce the cost pressure that that acceleration has on customer rates.
That's great color. Thanks, a lot Scott.
There are no further questions at this time I would now like to hand, the call back over for closing remarks.
That concludes our call today, thanks very much for your interest.
This concludes today's conference call you may now disconnect.
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Okay.
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