Emera Incorporated (EMA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to today's special Emera conference call. [Operator Instructions] This call is being coordinated on Friday, June 28, 2024. I would now like to turn the conference over to Dave Bezanson, please go ahead.

Thank you, Julie, and thank you all for joining us for this conference call and live webcast. A little over an hour ago, Emera announced a change aimed at enhancing long-term shareholder value through a strategic update we made to our growth guidance and our dividend growth rate. Joining me to discuss these developments is Scott Balfour, Emera's President and Chief Executive Officer; and Greg Blunden, Emera's Chief Financial Officer. Before we begin, I'd like to advise you that this morning's discussion will include forward-looking information, which is subject to the cautionary statements contained in Emera's Q1 2024 MD&A and in Emera's press release issued earlier today. Today's discussion will also include references to certain non-GAAP financial ratios. As noted in today's press release, you should refer to Emera's Q1 2024 MD&A for further information on non-GAAP financial measures and ratios. Today's press release and Q1 2024 MD&A are available on Emera's website at emera.com. Now I'll turn things over to Scott.

Thank you, Dave, and good morning, everyone. We appreciate you joining us for today's call, particularly those of you in Canada who are dialing in on the Friday of a long weekend. This week, Emera held its annual Board of Directors strategy session, during which we reviewed the diverse growth opportunities that lay ahead. We left these sessions with renewed confidence in our market position, our ability to meet customer and stakeholder expectations and our potential to enhance value for our shareholders. The decisions we announced this morning reflect our fundamental confidence in the future of our company. Today, I'll outline some of these opportunities and the steps we are taking across our businesses to deliver them for our shareholders. As part of our strategic review, we are introducing new 3-year EPS average growth targets of 5% to 7% through 2027 based on current consensus for 2024. We're also extending our previously announced rate base guidance of 7% to 8% over 5 years, taking us through 2029. We also announced an adjustment to our dividend growth rate guidance. This is a key step in our broader strategic initiatives to reallocate capital towards the high-growth opportunities that underpin our business. By targeting a dividend growth rate of 1% to 2%, we aim to continue to deliver long-term value by funding more of our robust rate base growth, with internally generated cash flows from the high-growth jurisdictions where we operate. Together, these measures set Emera on a path to reduce our dividend payout ratio of adjusted net income to approximately 80% by the end of 2027, with continued improvement in the following years. These are significant steps in ensuring the sustainability of our dividend while positioning the company for a robust future growth. Let me be clear, the decision to change our forecasted dividend growth rate in no way affects the current dividend amount, something you've heard me say in the past is untouchable, nor does this change our ongoing commitment to keep growing our dividend. Emera's shareholders can continue to expect dependable and growing dividends, underpinned by our prudent financial management and disciplined capital allocation. Our new dividend growth rate target delivers on that commitment to shareholders, while also better positioning us to finance our robust investment opportunities, and is an important step forward to reduce our payout ratio over time. This positioning is exciting and positive as several key trends are converging to shape a new future for regulated utilities, making it a pivotal time for investment. These trends include the push for decarbonization and electrification, the growing need for resilience against climate-related challenges and the increasing overall demand for electricity. The capital required to meet these demands is at unprecedented levels, providing a strong foundation and trajectory for continued growth. With a stronger balance sheet, a disciplined capital investment plan and a premium portfolio of assets located at high-quality jurisdictions in North America, Emera is well positioned to meet this moment. Florida, where we own 2 leading utilities, offers particularly compelling opportunities, and I will spend a moment outlining what we're seeing in the state. Florida's population growth in recent years has been remarkable. More and more people are moving to the Sunshine State. In fact, approximately 1,500 people are moving to Florida every single day, and Florida's economy continues to strengthen. If Florida were a country, it would have the 15th largest economy in the world. This economic and population growth is bolstering Emera's growth. Given the extensive service areas covered by Tampa Electric as well as Peoples Gas, which is the largest local distribution company in the state, this influx of new customers has directly translated into increased demand for both electricity and natural gas across the residential and commercial sectors. We expect Peoples Gas will be our second largest contributor to Emera in 2024 behind Tampa Electric, which is today our largest at just over 50% of our earnings. Our investment focus in Florida is about servicing the strong economic and population growth, supporting ongoing electrification trends and enhancing reliability and resilience for customers. We plan on investing 75% of our capital program in Florida. However, Florida is not the only area where we see potential. We're seeing growth in New Mexico, and we will continue to invest in Nova Scotia with a focus on reliability. Nova Scotia is another region experiencing rapid growth, coupled with a legislative need for decarbonization. By continuing our investments across these high potential areas, we aim to achieve a rate base growth of 7% to 8% over the next 5 years. We are also expecting 2 rate case decisions this year at New Mexico Gas and Tampa Electric. As we look ahead to these milestones, and to provide additional clarity to investors, we'll begin sharing detailed 5-year capital investment and rate base growth forecast with our next annual update later in 2024. In bringing our ambitious growth plans to life, our funding plan remains unchanged. We're using internally generated cash flows, debt raised at the operating company level, equity and select asset sales. An important part of our work in 2024 has been to strengthen our balance sheet, with a clear focus on improving credit metrics this year and beyond. We have accomplished what we said we would do, and we're ready to turn our attention to executing on the growth opportunities that are ahead of us. This quarter has been a busy and productive one for Emera. In early April, $117 million of Nova Scotia Power's unrecovered fuel and purchase power costs were securitized by the province of Nova Scotia. Nova Scotia Power has been financing the rising and fluctuating cost of fuel and purchase power on behalf of its customers over the last few years, in an effort to reduce the volatility of rate impacts. This securitization allows for a reduction in the near-term rate impacts for customers from the necessary recovery of these costs and in turn, reduces the debt and leverage levels for Nova Scotia Power and Emera. Nova Scotia Power is working with government partners on additional securitization efforts for further risk mitigation benefits for customers and debt reduction for the business. On June 4, we closed a $1.19 billion transaction that transferred our equity interest in the Labrador Island Link to KKR. This supports our capital investment plan over the 2024 to 2026 period. We previously indicated we would fund up to 15% of the capital plan through asset sales. And with this single transaction, we successfully met that objective. This transaction improves our 2024 credit metrics by 60 basis points. Finally, on June 18, we completed a USD 500 million issuance of hybrid notes. The net proceeds were principally used to repay our USD 300 million notes that matured on June 15, 2024. This financing will receive 50% equity treatment by the credit rating agencies, further reducing holding company leverage and improving 2024 credit metrics by 20 basis points. Together, these 3 actions reduced our consolidated debt by approximately $2 billion, and will improve our 2024 credit metrics by almost 100 basis points. These actions are evidence of our commitment to improve the financial strength of our company, once again shows our willingness to execute on big decisions, while we also continue to have valuable and ongoing optionality in our portfolio. This disciplined approach to capital allocation and portfolio optimization underpins our strategy and decision-making, and ensures we are well presented to deliver value to shareholders and to capitalize on the opportunities ahead. Beyond these recent opportunities, there are several other catalysts that give us confidence in delivering on our ability to fund our capital plan. The many initiatives we've taken across the business have resulted in considerable progress on reaching our key credit objectives, which are to maintain our investment-grade credit ratings, which are critical to our long-term financial health and to minimize our cost of capital; to maintain our target capital structure to ensure we have a balanced approach between debt and equity, providing us with the flexibility to manage market fluctuations; to sustain cash flow to debt metrics above 12%, which demonstrates our ability to generate sufficient cash flow to cover our debt obligations comfortably; and to keep our holding company debt to total debt ratio below 35%, down dramatically from its peak of 56% as it was just a few years ago in support of the acquisition of TECO. An additional note on asset sales. As we indicated earlier this year, we launched 2 asset sale processes to the market in 2024, with an expectation that at least one would advance and be announced by mid-year. We successfully achieved that objective with the LIL transaction, which successfully closed in June, with immediate positive impact on our balance sheet and credit metrics. While the second asset sale process remains active, it may or may not ultimately result in a transaction. As you would expect, we will proceed with asset sales only when transactions meet specific criteria, including clear return thresholds and delivering value to shareholders. To conclude, this is a very exciting time for Emera, for the industry and for Emera, with an optimized portfolio of well-performing, well-run operating companies, each of which intently and effectively meet the evolving needs of their customers, we are well positioned to capture the opportunities ahead and deliver value to shareholders. In addition to ongoing dividend growth, we're targeting average EPS growth of 5% to 7%. We're committed to ensuring we have a strong balance sheet with a stable credit rating. We've been delivering on our clear and disciplined value enhancement plan, making progress on all fronts. With a number of additional upcoming catalysts, including the pending rate case decisions, we have every confidence that we will continue to enhance long-term value for our shareholders. Once again, thank you for joining us on Friday morning before the long weekend. This is an important announcement. I want to make sure that you had the opportunity to hear it from me. If I don't have the opportunity to talk or see you again before our earnings call, I hope you have a great summer. And with that, Greg and I are happy to take your questions.

[Operator Instructions] Your first question comes from Rob Hope from Scotia Bank.

First question is just maybe can you walk us through the thinking of announcing that today, having this call today, meanwhile the asset sale -- or the second asset sale program continues to progress. Is that -- does that reflect uncertainty in that asset sale being completed? Or should we think of it as the asset sale will be neutral to EPS and as such, wouldn't impact future guidance, at least on the EPS side?

Yes. I think, Rob, whether we see a second asset sale or not, it would not be impacting our view of the guidance that we just announced.

And then can you comment on discussions with rating agencies? Have they -- were they brought inside the tent on this one as well as maybe comment on following the little sale, their view that they would prefer to see some additional asset sales.

Yes, Rob, it's Greg. Yes, I mean, we have regular dialogue with the rating agency, so they would have been brought up to date in advance of this morning's press release in terms of what the content of that press release would indicate. Look, our conversations remain constructive with the rating agencies. Obviously, as Scott indicated, we made a lot of progress, in particular in the last quarter. I think that's very much in line with their expectations. The second asset sale that most people speculate would not have any impact on 2024 credit metrics, irrespective of whether or not it transacted or not because of the regulatory approvals that would likely come with such an asset. But all to say is I think we're in a good spot. I'm not surprised that they haven't taken action yet. They will be a little bit more conservative. That's their nature, and that's fine. But we are extremely confident that we're going to hit our target threshold credit metrics in 2024.

Your next question comes from Maurice Choy from RBC Capital Markets.

So follow-up on the guidance part of it. So the 5% to 7% EPS growth, I suppose, is based off 2024. If MMPC happens, does the 2024 base year get rebased let's say, lower for any dilution?

Yes, Maurice, it's Greg. I won't comment on a specific asset sales, but how Scott may have answered a previous question, irrespective of whether or not a transaction, a second asset sale happens, we are still confident that the EPS guidance we provided off of 2024 would remain intact.

Understood. And just so I understand, beyond this potential asset sales. You did mention in your press release that you are going to continue looking at your portfolio in terms of optimization. Can you just discuss what that meant perhaps beyond the current asset sales that you're looking at? Is there anything else?

Maurice, it's Scott. Really, there we're just getting back to the position that we've always been in where we continually review our portfolio with a view to exploring, determining through the appropriate allocation of capital. And as I said, we're blessed with the portfolio that has some optionality in it. And so it's really more of an ongoing process as opposed to the more time-defined specific process that we've been speaking about for the last couple of quarters. On an ongoing basis, as we always have, we'll continue to review the portfolio. And if we see opportunities for capital recycling that makes sense for shareholders, we'll continue to explore them as we always have, but really getting back more to ordinary course discipline as opposed to the focused effort that we spoke to over the last couple of quarters that ultimately concluded with the transaction on the Labrador Island Link that from our perspective was fabulously successful.

But to follow up, when you mentioned earlier that you project that your credit metrics will go above 12% and beyond, that based mainly on organic cash flow growth rather than any further asset sales. Is that a fair statement?

Well, we -- I'd say it this way, Maurice. There's multiple paths, we can always take you there. But certainly, we're comfortable with -- given the steps we've taken, we're comfortable with the organic path, but we always look at how does that organic path compare to the opportunity to potentially recycle capital. There's other assets in our portfolio that have been speculated on Acacia in the past, and I think that's fair and reasonable. Scott also highlighted that we're having continuing conversations about additional fuel securitization. So there's multiple paths that get you there, but all to say is we're comfortable each and every one of those paths accomplish it, our objectives.

Yes. Maybe just to tie all this together. Maurice, as you know, we would have some components to our portfolio that investors would speculate as to the long-term fit within the portfolio, some smaller assets that we'll always look at those opportunistically if there's an opportunity to transact and enhance value. But we're not looking at that kind of thing in relation to achieving credit metrics for 2024. Really the key message today is that we've got confidence in the path that we're on, and we're turning the page, focusing on execution, focusing on capturing the growth opportunities that we've got with shareholders, communicating that through the introduction of clarity around EPS growth as we've announced, and also taking the disciplined, prudent decision to moderate the growth rate of our dividend to ensure that we are optimizing how we're investing the cash flow generation that the business has in order to invest in those growth opportunities. So that really is the core message that we're trying to convey to investors today.

Got it. And just to finish up, and I just want to -- I understand your path to the 12%. I think Moody's had you at 9.8% by the end of 2023. I think, Scott, you mentioned earlier that the LIL sale and the hybrid issuance gets you almost 100 basis points. So let's call it 10.8%. Is the remaining 120 basis points split, let's say, half a potential sale and half between the Tampa Electric rate case and anything beyond that, let's say, is the cherry on the cake?

Yes. I think there's a couple of things also to keep in mind. I mean there is a substantial step-up in cash flows at Peoples Gas this year, Maurice, from this successful rate case outcome we had. So you have to build that and we will anticipate to have new rates at New Mexico Gas in the fourth quarter of this year. And of course, the trailing 12 months at year-end last year, incorporated what was a relatively soft Q4 in particular because of weather at Tampa Electric. So if you take all of those things combined, it's a combination of the actions we're taking to reduce debt, but also what we're seeing from our business and the growth of cash flows just on an organic basis.

Your next question comes from Ben Pham from BMO.

A couple of questions on the dividend. Can you walk through the thought process of how you got to 1% to 2%, and why not just not grow at all? And then can you talk about is there a time frame that this new growth rate translates to? And is 80% the right level now for Emera?

Ben, thanks for the question. So look, we made a determination that reducing the dividend growth rate was prudent, but it was still important to deliver growth in dividends over time. And so with that commitment is what led us to the 1% to 2% as opposed to something that is -- that was lower or higher than that. And I think that really is part of continuing to convey the prudence and discipline around the allocation of capital, but still remaining focused on delivering value to shareholders, including an increasing dividend. And I'm sorry, Ben. I've forgotten the second part of your question. On the time frame. Yes. So we didn't bind it with the time frame, Ben, and the 80% reference is really just providing some clarity and focus in terms of the meaningful progress that we expect to make in the reduction of the payout ratio. Of course, you can do that math against the 2024 consensus and look at that 5% to 7% target growth. And I would remind you that, that growth is on average. That doesn't mean it will be between 5% to 7% each year of those 3 years. There could be some years that are lower and some years that are higher, but we are confident over the 3-year period that we will see that level of growth. And we would expect, as I said, that, that dividend payout ratio will continue to come down further toward what we've historically described as our payout ratio -- target pay ratio of 70% to 75%. But even that's something we'll continue to look at. We're looking to ensure we're in line with our peers on our payout ratio, and we'll continue to assess that over time. But really, the focus of this is to make sure that we're using as much internally-generated cash flow as we can to invest in the high-growth opportunities that are in front of us and deliver that value to shareholders through earnings growth.

Okay. Maybe a cleanup question on the EPS guidance. Can you share what FX assumption that you're using in that? And I noticed you have a scenario of 7% EPS growth, which is quite similar to rate base growth despite the DRIP and ATM still in that plan. Is that more consistent narrowing between the two? Is that expectation in the rate case outcomes driving a bit of a better boost in earnings?

So Ben, I caught all of that -- it's Greg. I caught all of that except for the very first part of your question, which might have been the most material part of your question. So could you just repeat the first part of your question again, Ben?

Yes, definitely. I was asking what is your USD FX assumption?

Sorry. Yes, we're assuming that coming off at '24 and going forward, that would be a constant FX. So we're at kind of at the 1.35 level.

Okay. And then can you talk about more directionally in that 7% EPS growth and narrow why it's close to rate base growth when you got your share count rising gradually over time?

Yes. I mean, what could cause it to go towards the top end of the band or the lower end of band in any given year. It's not so much about the share count perspective, but it's probably more about the performance of the operating entities. So if you get a year where you have extremely favorable weather in our electric utilities, that will likely push EPS growth up a little bit higher. And I would say the opposite is also true. So it's less about the financing of the business or the rate base growth, but more within the range of what we would expect from the performance of the businesses.

Your next question comes from Mark Jarvi from CIBC Capital Markets.

If you take the midpoint of the growth in the dividend, a 1% to 2% in the EPS kind of track towards more like a mid-80% pay ratios. When you're talking about getting towards 80% in 2027, is that the confidence that you can hit the top end of the EPS growth and then you'll be at the low end of the dividend growth?

Mark, it's Greg. I think it's a little premature to be guide towards the top end. But look, when we model out where we are now expecting our dividend growth to be and the confidence we have in the EPS growth, I think the way that Scott's characterized it is probably the best place to leave it as we would -- we are targeting to be around the 80% or very close to it by the end of '27.

And then just coming back to comments about being able to drive that EPS growth with or without asset sales not being too impactful. So just what would be sort of the assumptions around ATM usage going forward? And then if you did -- is the view in the ATM usage with the dilution that, that comes as largely equivalent to what you think from an asset sale or if you did see an asset sales are possible that you're more at the lower end of the 5% to 7% range?

Yes. I think it's tied in a little bit, Mark, to the comments on whether an asset sale would have a material impact on EPS. And as we indicated, we don't think it would materially move the numbers. So I think you can probably assume that whether you raise that equity through an ATM or an asset sale, it's just not going to have a meaningful impact on what we expect from an EPS growth over the forecast period. In terms of some details around the funding plan, we'll be rolling out our funding plan consistent with what we historically have done when we roll out our updated rate base plan later this year.

Okay. And then in your guidance, what's the assumption on the outcome of the TECO rate case? Is there anything you can share in terms of what that would be? Is it assuming that you get all the requests, 30% haircut. Is there anything kind of say that's kind of built into that guidance?

Yes. We're not -- I'm not going to speculate on what the outcome of the rate case would be. We feel very good about what we have filed with the Florida Public Service Commission. The process is underway, but it wouldn't be appropriate to comment on an active rate case at this point in time.

I figured as much, but I got to try at least. And the last question, when would we know for sure whether or not another asset sale -- you've exhausted that process and you're done, is there something you could say by the time we get to Q2 earnings in August that you'll have a definitive answer whether or not you move forward or you put that to rest?

Yes. I mean I wouldn't want to put it sort of being in the same place we've got [indiscernible] down to it, Mark. I understand -- I certainly understand the question. But look, I mean, we get to a transaction, certainly, we will immediately announce it. And if we don't, we won't. I would be surprised if on our Q2 call, we get asked the question if there hasn't been an announcement, and certainly, we'll deal with it then. But I don't really want to start to think about trying to put a time expectation on this. Really, what I'm saying is that we may or may not transact on the second asset sale. We'll only do it if it -- if we deem it to be in the interest of shareholders over the long term. And if we don't get to that place, we will not transact with confidence. And as I say, that we are -- that we've turned the page, that we're in the right place now as it relates to our balance sheet and our credit metrics and obviously, confident enough to be clarifying to the market, our expectations around delivering the growth that we see in investment opportunities and the translation of that into earnings and reduction of payout ratio over time.

[Operator Instructions] Your next question comes from Patrick Kenny from National Bank Financial.

I just wanted to follow up here on -- I think it was Ben's question. And I appreciate not wanting to be balanced by any specific time frame as it relates to the 1% to 2% dividend growth, but assuming your peers maintain their existing dividend growth rates over the coming years, would it be your goal, I guess, to return to a mid-single-digit dividend growth rate perhaps after 2027, after your payout ratio meets your 80% target or should we just view this as the plan is to keep the 1% to 2% growth rate here for good?

I don't think -- either of those things, Patrick, I think, in the middle, certainly we haven't time bound it. I wouldn't want to be in a place where we're saying we'll be looking to increase the dividend growth rate at 2027. I would not set that as an expectation. Our objective would be to get the payout ratio down within the 70% to 75% range, which has historically been our target payout ratio, and then we'll reassess at that time based upon where our peers are, based upon where our opportunities are. But our objective would be to get it into the low 70s, which, of course, you can do the math and run that out over a period beyond 2020 -- 2027. But our first focus is there, and we'll continue to reassess the dividend level. As you know, of course, dividend rates get determined by the Board of Directors. It's an ongoing conversation that we have with the Board, but it would be premature to speculate on when the growth rate might increase again, and but I would not set an expectation that, that would happen once we got to 80%.

Got it. Okay. And then just back to the asset sales. And I guess I understand how you would process play out, just given the amount of work. I'm sure that [indiscernible] into it. But just given your confirmation in the press release that the disposition of LIL satisfied your 15% fund is fair. I view the second asset sale as being perhaps more tied to accelerating your growth plan, perhaps tied to sanctioning that $2 billion of potential CapEx over and above your base plan? Or is it more just viewing the incremental proceeds as perhaps as you said, adding shareholder value just by further enhancing your balance sheet metrics.

Yes. Really, I think, yes, it's got a financial lens to it. It's also got a strategic lens to it. It's really a matter of whether we see a transaction that is in shareholder interest over the long term, both as it relates to the strategic and financial impacts of that transaction. And if we see a transaction that crosses that threshold, then we'll proceed. And if we don't, then we'll continue to retain the asset and continue to deliver growth and value to shareholders with benefit of that asset continuing. What I mean what I say, we're blessed with a portfolio that gives us some optionality. And we have confidence in all of the assets that we have in our business and the opportunity to transact to sell one, we will only do when we see it as in the best interest of shareholders. And at this point, with that second asset sale, it's not sure whether we will cross that threshold or not.

And there are no further questions at this time. I will turn the call back over to Dave Bezanson for closing remarks.

Thank you all for joining us today on such short notice. We appreciate your interest and support of Emera. If you have any follow-up questions, please reach out to the Investor Relations team. We'll be happy to find the time to connect. Have a great day and a great long weekend.

This concludes today's conference call. You may now disconnect. Thank you.