Q1 2023 Emera Incorporated Earnings Call
Speaker 2: Good morning ladies and gentlemen and welcome to the Ameriinc Q1 2023 analyst conference call. At this time all lines are in listen-only mode. Following the presentation we'll conduct a question and answer session. If at any time during this call you require immediate assistance please press star 0 for the
Speaker 2: This call is being recorded on Friday, May 12, 2023. I would now like to turn the conference over to Dave Bezanson, VP of Investor Relations. Please go ahead.
Speaker 3: Thank you, Colin, and thank you all for joining us this morning for AMIRA's first quarter 2023 conference call and live webcast.
Speaker 3: Amiris' first 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 Amiris.com.
Speaker 3: Joining me for this morning's call are Scott Balfour, a mirrors president and chief executive officer, Greg Blundin, a mirrors chief financial officer, and other members of a mirrors management team.
Speaker 3: Before we begin, I would like to 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.
Speaker 3: Today's discussion and presentation will also include references to non- GAAP financial measures. You should refer to the appendix for definitional information and reconciliation of historical non- GAAP measures to the closest GAAP financial measure. And now I will turn things over to Scott.
Speaker 4: Thank you Dave and good morning everyone.
Speaker 4: Amera reported strong first quarter results this morning, with 99 cents of adjusted earnings per share and a 36% increase in operating cash flow before working capital, compared to the first quarter of 2022.
Speaker 4: The 8% increase in adjusted earnings per share year over year was primarily driven by higher earnings from our marketing and trading business and the impact of new rates and an asset management agreement at New Mexico Gas.
Speaker 4: The benefit of new rates at Tampa Electric and Nova Scotia Power were offset by the impact of higher interest rates as well as milder weather in both Florida and Nova Scotia.
Speaker 4: In addition, results at Nova Scotia Power were negatively impacted by the requirement to recognize the full provision for the $10 million penalty related to the province's renewable energy standards.
Speaker 4: As a result of the delays in the commissioning of the Labrador Island link and the ongoing testing in 2022, we received less renewable energy from Newfoundland Labrador, which put Nova Scotia power modestly below the 40% renewable energy requirement.
Speaker 4: However, I'm pleased to say that with flows of energy from the block this year continuing to stabilize and increase.
Speaker 4: Nova Scotia Power's energy supply year-to-date has exceeded the 40% renewable requirement.
Speaker 4: While accounting rules required us to recognize the penalty in the quarter, we respectfully disagree with the penalty and intend to appeal it to the regulator, and we would anticipate a decision on that before the end of the year.
Speaker 4: Last month, Newfoundland and Labrador Hydro successfully completed high-powered testing on the Labrador Island link and as such received the confirmation of commissioning from the independent engineer.
Speaker 4: Nova Scotia Power customers have already received more than 1 million megawatt hours of clean hydro energy over the Maritime Link.
Speaker 4: which has meaningfully reduced carbon emissions in the province.
Speaker 4: This investment also saved customers in Nova Scotia, almost $100 million in 2022, by reducing the need to purchase high-carbon fuel at elevated prices.
Speaker 4: With commissioning complete, we've now begun recognizing cash earnings on our LIL investment.
Speaker 4: an important step forward towards our cash flow and credit metric targets.
Speaker 4: We deployed over $600 million in capital in the first quarter of 2023, and we're on track to deliver our capital plan of almost $3 billion this year.
Speaker 4: Over 75% of our three-year capital program will be invested in our Florida operations.
Speaker 4: driven largely by the significant economic growth in the state.
Speaker 4: Florida was the fastest growing state in the US last year, and it's also one of the 20 largest economies in the world.
Speaker 4: With significant customer growth in excess of 2% at Tampa Electric in 2022 and approximately 5% at Peoples Gas, our capital deployment reflects the capital investment necessary to service that growth and deliver reliable energy for our customers.
Speaker 4: A tampoelectric we continue to invest in solar with another 239 MW to be installed by the end of the year.
Speaker 4: which will bring Tampa Electric's total solar generation capacity to over 1,200 megawatts.
Speaker 4: representing approximately 22% of Tampa Electric's generation capacity and 14% of expected actual energy production.
Speaker 4: We are also making significant investments in grid hardening and reliability through Tampa Electric's Storm Protection Plan.
Speaker 4: These projects are transforming the grid in Tampa for benefit of our customers.
Speaker 4: We're also highly focused on investments in system reliability in Nova Scotia and at our gas utilities.
Speaker 4: as well as to support customer growth and in continuing to strengthen these systems from the impacts of severe weather events.
Speaker 4: We continue to manage our capital plans to ensure we are meeting legislative requirements as well as customer and regular regulator expectations.
Speaker 4: while at the same time managing the pace of investments in the energy transition in order to minimize cost impacts for our customers.
Speaker 4: Our investments in cleaner and more reliable energy across the business are enabling significant progress towards the first milestone in our climate commitment.
Speaker 4: a 55% reduction in CO2 emissions by 2025.
Speaker 4: Last year, we achieved a 41% reduction in carbon emissions compared to 2005, thanks in large part to our investments in solar and clean hydro energy being delivered over the maritime link.
Speaker 4: With over 60% of our capital plan focused on investments in cleaner and more reliable energy, we remain on track to achieve our first climate goal in less than two years.
Speaker 4: As we continue to work towards meeting the federal and provincial government's ambitious climate goals for Nova Scotia, we continue to believe that the Atlantic Loop is the most cost-effective solution for our customers without putting system reliability at risk.
Speaker 4: The federal government reinforced its support for the project in its March budget, and I'm pleased to say we're supporting active negotiations in an effort to make this transformative project a reality.
Speaker 4: Given the scale of this capital project, and with 2030 quickly approaching, it's critical that we get started as soon as possible.
Speaker 4: with clarity needed on the path forward this summer.
Speaker 4: With the recent successful conclusion of several major regulatory proceedings, it's a little quieter on the regulatory front this year.
Speaker 4: During the quarter, the Florida Public Service Commission approved Tampa Electric's fuel and storm cost recovery request as filed.
Speaker 4: The timely recovery of these previously incurred costs will allow us to make important progress on key credit metrics this year as we pay down the related short-term debt.
Speaker 4: The team at People's Gas also filed their petition for a future rate increase with the regular for a requested $138 million in new rates effective January 1st of 2024.
Speaker 4: Since their last rate increase in 2021, People's Gas has deployed more than $1 billion of rate-based investment to serve the growing population of Florida and to ensure their system continues to operate safely and reliably.
Speaker 4: We expect hearings for the rate case to take place in late summer with a decision in the fourth quarter.
Speaker 4: Overall, our businesses are performing well.
Speaker 4: Whether, of course, will always be a variable in our industry, but the underlying growth in our core utilities is strong.
Speaker 4: We remain intensely focused on strengthening our balance sheet and looking forward to the rest of the year with new base rates at three of our four core utilities. We expect to continue to deliver solid earnings growth and cash flow performance.
Speaker 4: And with that, I'll turn it over to Greg to take you through our financial results. Greg, thank you Scott and thank you all for joining us.
Speaker 3: This morning we reported first quarter adjusted earnings of 268 million dollars and adjusted earnings per share of 99 cents.
Speaker 3: compared to $242 million in 92 cents in 2022, representing an 8% increase in adjusted earnings per share year over year.
Speaker 3: This quarter's results continue to demonstrate the value of our diverse portfolio. We saw stronger contributions from a mirror energy and new Mexico gas, which was able to more than offset the lower contributions from Tampa Electric and Nova Scotia Power, whose results were somewhat weaker due to higher interest rates and milder weather conditions.
Speaker 3: And of course, no scotia powered book, the $10 million penalty that's got referenced a few moments ago.
Speaker 3: Operating cashflow before changes in working capital increased by 36% over year, despite the unfavorable weather in the quarter.
Speaker 3: Excluding the impact of fuel deferrals, operating cash flow increased by $56 million or 10% over Q1 2022 in line with our expectations.
Speaker 3: At our Investor Day in March, we outline the step changes in cash flow and debt reduction we expect to achieve in 2023 that will result in meaningful improvement in our key credit metrics.
Speaker 3: This included new rate agreements, a tampa electric, no-scotia power, and a Mexico gas, all of which went into effect in Q1.
Speaker 3: included cash contributions from the Labrador Island Link whose AFUDC earnings converted to cash earnings in April with the commissioning of the LIL.
Speaker 3: And finally, it included the Recovery of Storm and Fuel Costs at Tampa Electric, the Recovery of which was approved as filed by the Florida Public Service Commission during the quarter and the Recovery began on April 1st. Perhaps more importantly, Fuel Costs have stabilized.
Speaker 3: And last year we were under recovery non-fuel so far in 2023 we are seeing an over-recovery that is helping to further pay down the unrecovered balance faster than we otherwise would have expected. And while we are adjusting for the effect of the collection of fuel costs in our cash shelf, this will reduce the outstanding debt balances associated with financing these under-recovery.
Speaker 3: and therefore will improve our credit metrics.
Speaker 3: As we execute on the strategy that we laid out for you at Investor Day, we are already beginning to see measurable progress.
Speaker 3: While cash flows this year from Lill will be modestly lower than anticipated through the delay in commissioning and an expectation that the incremental Lill investment will be deferred, this is more than offset by the stronger than expected performance at a mirror energy and new Mexico gas in the first quarter.
Speaker 3: Compared to Q1 2022, operating castle 4 changes in working capital, excluding the impact of field of virals increased 10%, and we remain on track to achieve the $2.1 billion in operating castle and 11.5% cast of debt metrics that we outlined in March.
Speaker 3: And now I'd like to turn our attention to the details of our quarterly results. Mirror Energy's marketing and trading business delivered a very strong quarter with $53 million in adjusted earnings, more than double their $25 million contribution in 2022.
Speaker 3: The weather was generally mild, but AmeriEnergy realized unfavorable hedges that were entered into during 2022's elevated market.
Speaker 3: In addition, the mild winter meant more gas transportation capacity was available, which the business was able to capitalize on.
Speaker 3: And finally, there was a brief cold spell in early February that brought price and volatility spikes and thus trading opportunities.
Speaker 3: Despite the strong start, AmeriEnergy is not adjusting its annual earnings guidance, which stands at $15-30 million US dollars.
Speaker 3: While Q1 had the benefit of the hedges I just mentioned, similar to what we saw in 2019, we expect some of those impacts to reverse in Q2 and Q3.
Speaker 3: Q2 and Q3 are always challenged for profitability because the cost of the transport and storage are amortized equally over time despite the fact that related revenues are mostly earned in the winter months.
Speaker 3: In addition to 2023 contracts, we're bid into 2022's market and so costs are somewhat elevated compared to the last couple of years. Moving to our gas utilities, New Mexico gas delivered a $14 million US dollar or 73% increase in earnings compared to Q1 2022. Similar to last quarter, this was driven by favorable asset management agreements. The work it an
Speaker 3: that the business entered into to utilize excess pipeline capacity as well as new base rates that went into effect on January 1st. Due to a combination of market conditions and weather in the region surrounding New Mexico Gas, the AMA generated approximately 38 million US dollars of benefit of which 27 million US dollars will be returned to customers.
Speaker 3: and the remaining $11 million before tax contributed to the higher earnings for the quarter. We do not expect to see this kind of contribution continue for the balance of the year.
Speaker 3: Contributions from Tampa Electric decreased $9 million US dollars compared to Q1 2022. The decrease was primarily driven by higher interest and operating expenses. While weather in the quarter started off mild, especially compared to the very favorable weather in Q1 2022, impacts on load were largely offset by strong customer growth.
Speaker 3: With new base rates in effect as of January 1st and the continued economic and customer growth, the business continues to be very, very strong.
Speaker 3: Contributions from her Canadian utilities decreased $10 million compared to Q1 2022. Much like in Tampa, we incurred higher interest expense and experienced a milder winter here in Nova Scotia.
Speaker 3: In addition, during the quarter, Nova Scotia Power was required by accounting rules to recognize a $10 million penalty related to renewable energy standards.
Speaker 3: We intend to appeal this imposed penalty to the regulator later this year.
Speaker 3: Excluding the impact of the penalty, the financial performance of the utility in the first quarter of the year was solid, as new rates are in effect and we continue to see load growth year over year driven by customer growth and the impacts of electrification.
Speaker 3: However, we continue to expect performance for the year to be close to, or slightly below, the bottom end of our ROE range at a reduced equity thickness of 35%.
Speaker 3: Corporate costs increased $13 million this quarter, primarily driven by higher interest costs. These were partially offset by the time in share based compensation expense and the related hedges.
Speaker 3: And finally, higher share count decreased adjusted earnings per share by 3 cents in the quarter.
Speaker 3: Earlier this month, we completed a $500 million issuance of senior unsecured notes at Amera to address our only holding company majority this year.
Speaker 3: And in March we issued $500 million of unsecured notes at Nova Scotia Power for general corporate purposes.
Speaker 3: We saw strong market support for both transactions.
Speaker 3: I want to take this opportunity to reinforce that we remain committed to our investment-grade credit ratings and that we continue to engage regularly with the credit rating agencies.
Speaker 3: In support of our financing transactions this year, all four rating agencies confirmed our ratings and outlooks in their standard letters. As we continue to execute on our capital and funding plans this year, I am confident that our growth in our utilities will allow us to achieve the targeted credit metrics that we have set out on a sustainable basis. And now I'll turn it back over to Dave.
Speaker 4: Thank you, Greg. This concludes the presentation. We would now like to open the call for questions.
Speaker 2: Thank you. Ladies and gentlemen, we'll now conduct the question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, press star then two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. And your first question comes from Rob Hope from
Speaker 4: Good morning everyone. First is on the financing plan. At the Tamper investor day a couple of weeks ago you highlighted a number of other levers you could pull to strengthen metrics in 2023 including deferring some capex as well as optimizing some working capital. Can you give me to give us an update on those items and I guess as well it seems like your cash flow was strong or in line with expectations.
Speaker 3: that is now fully commissioned, it looks like the $240-ish million of true up capital will likely be in early next year as opposed to this year. Absent that, we're still looking through our capital plans, but nothing definitive at this point that we're ready to communicate to you. So, certainly a refresher.
Speaker 3: to have our cash flow increase 10% on a year-over-year basis and we achieved that in the first quarter of this year and that was obviously not incorporating any incremental cash from Labrador Island Link because that Commission didn't start to April 1. Certainly on a non fuel adjusted cash flow is significantly stronger than we...
Speaker 3: is obviously before starting to collect cash in Labrador Island Lake and also before collecting the unrecovered fuel costs and storm costs at Tampa Electric that did not start until April 1. So yes, I guess in summary we're feeling really really good with how cash flow has started the year and our forecast going forward.
Speaker 4: the project. Excellent. Um and then maybe just reading between the lines here on the Atlantic Loop project, the commentary or tone surrounding it seems more positive than. In prior quarters. Um could you maybe give us an update of the gates that have to be achieved to get
Speaker 4: as well as how far out can you push out capital deployment on that project.
Speaker 5: Yes, Rob and Scott, I'll let Peter answer most of this. Let me sort of the back part of that question in terms of capital. We'd still be in a place where we're not expecting to invest any material capital in the loop project itself. We're looking to support
Speaker 5: from engagement from other parties in terms of that. So we're still at this point not looking for a capital deployment other than projects inside the province of Nova Scotia, inside Nova Scotia Power proper. So let me let Peter answer the substance of your question.
Speaker 6: Sure, Scott. Hi, Rob. So yeah, I think.
Speaker 6: It's fair to say how you're reading between the lines is that discussions with the federal government and other parties involved remember this is you know a complex multi-stakeholder project Have intensified I would say over the last number of weeks, so we're having productive discussions with the federal government. We've always said that this project to work
Speaker 6: Our customers in Nova Scotia need direct federal support to help with the transition. I think you've seen public comments from the federal government that sounds like they're very committed to this project and we're pleased so far with the activity around the negotiation table.
Speaker 6: but I'd probably leave it there for now. Other than to reinforce Scott's point that we really hit the 2030 target, there's a lot to do, and so we really need clarity on the path forward. The biggest piece of that, what is the federal funding support, that we would need that clarity sometime this summer?
Speaker 6: for now, other than to reinforce Scott's point that we really hit the 2030 target, there's a lot to do and so we really need clarity on the path forward. The biggest piece of that, what is the federal funding support, that we would need that clarity sometime this summer? Thank you.
Speaker 7: Your next question comes from Maurice Choi from RBC Capital Markets. Maurice, please go ahead. Thank you very much and good morning. We're just sticking with the credit metrics theme here. You mentioned that you're feeling really good with your cash flow generation so far in Q1, yet you've reconfirmed 11.5% target for this year. Were there any headwinds that we should be aware of that might be preventing you from accelerating past 11.5% by the end of this year?
Speaker 7: And also with regards to different capex, maybe being a little more direct here, given where the market uncertainty is, is there a motivation to perhaps consider that even more forcefully despite having good cash flow generation just in case and then reaccelerate next year?
Speaker 3: Yeah, I think it's important to remember when I mentioned and referred to the 11.5% cash flow debt metrics, we're talking on a fuel normalized basis. And so on a fuel normalized basis, cash flow is unfolding pretty much exactly as we would have expected.
Speaker 3: You remember the catalyst to drive that were the three rate increases at Nova Scotia Power, Tampa Electric and New Mexico Gas which are now completed and of course the Labrador Island Link Commissioning which is also complete. So we're feeling really good on that path. What we are seeing though is obviously a reversal...
Speaker 3: just following up on my comments a few minutes ago Maurice, there's nothing at this point material that would be worthy of disclosing to you but I think it's also important to remember that you know our capital is being deployed in our utilities for the benefit of our customers and when we're seeing large customer growth quite frankly not just in Tampa Electric but in People's Gas we're seeing customer growth
Speaker 3: material above and beyond the Labrador Island Link screw-up investment that I mentioned earlier.
Speaker 7: and engagement with them about changing the outlooks back to stable.
Speaker 3: Yeah, I mean that's an ongoing conversation, Maurice. I mean generally they look through the fuel cost recovery side of it. So looking through maybe the cash flow perspective, but I think they're fairly consistent across the board. They don't normalize for the associated debt with respect to those fuel cost recoveries. Obviously, you know, with the majority of our underrecoveries in 2022, we're not going to be able to get through the fiscal year.
Speaker 3: any time soon.