Earnings Call Transcript - EMA Q1 2025

Operator, Operator

Good morning, and welcome to the Emera Q1 2025 Earnings Conference Call. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Thursday, May 8, 2025. I would now like to turn the conference over to Dave Bezanson. Please go ahead.

Dave Bezanson, Host

Thank you, Mike, and thank you all for joining us this morning for Emera's First Quarter 2025 Conference Call and Live Webcast. Emera's first quarter earnings release was distributed this morning via Newswire, and the financial statements, management's discussion and analysis and the presentation being referenced 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 Emera's management team. 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 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 reconciliations of historical non-GAAP measures to the closest GAAP financial measure. And now I will turn things over to Scott.

Scott Balfour, CEO

Thank you, Dave, and good morning, everyone. This morning, we reported first quarter adjusted earnings per share of $1.28, which is a 68% increase over the same period in 2024. I’m pleased to announce that this marks our strongest first quarter performance in the company's history, positioning us to exceed our 5% to 7% earnings growth per share target for 2025. Our first quarter results were fueled by outstanding performance across our regulated utilities. Tampa Electric and New Mexico Gas benefitted from new rates reflecting the investments they have made for their customers. Additionally, Nova Scotia Power saw improved results due to the colder winter weather we experienced. The performance of our regulated utilities was further enhanced by a record quarter at Emera Energy. Cold weather in the Northeast led to higher prices and market volatility, allowing the business to seize opportunities for exceptional results. This quarter’s performance is largely a direct result of the strategic actions we took in 2024, which laid a strong foundation for our current success. Last year, we successfully executed our asset sale program, strengthened our balance sheet, adjusted our dividend growth guidance, and finalized two significant rate cases. These steps have enhanced our company's strength and positioned us well to turn our rate base growth into substantial earnings per share and cash flow growth. Our first quarter results reflect this progress, and we are confident in achieving strong overall performance for the year. We stand firm in our expectation of 5% to 7% average earnings per share growth through 2027. Teams across Emera have invested over $700 million in customer-focused capital during the first quarter, keeping us on track to fulfill our $3.4 billion capital plan for the year. Major ongoing projects such as our solar development, reliability investments at Tampa Electric, energy storage and reliability upgrades in Nova Scotia, and gas infrastructure expansion at Peoples Gas are progressing as scheduled. We continue to witness significant population and economic growth in Florida, with customer growth rates at Tampa Electric and Peoples Gas exceeding 1.5% and 3.5%, respectively, which drives substantial investment demand. Tampa Electric has ensured resource adequacy by contracting for two gas turbines to be delivered in 2028, addressing the anticipated increases in capacity needs arising from organic load growth and economic development goals in West Central Florida. These investments, alongside ongoing reliability, resiliency, renewable integration, and technological upgrades, are crucial to our anticipated rate base growth of 7% to 8% and are fundamental to our long-term earnings growth expectations. Despite uncertain macroeconomic conditions, we are focused on managing our capital deployment with an emphasis on customer affordability and timely rate recovery. Should we encounter tariff or supply chain impacts on our capital plan, we intend to adjust our capital expenditures to maintain our targeted 7% to 8% rate base growth, ensuring we do not negatively affect affordability while meeting customer needs. Accordingly, we do not foresee any significant changes to our 5-year capital plan. Our teams are committed to mitigating supply chain risks and exploring domestic supply alternatives to minimize direct tariff exposure for our customers. We have already secured panels for our solar investments through 2026, after which all new panels will be sourced domestically, with tariff risks contractually managed until 2029, mitigating concerns related to our largest major project. At Peoples Gas, pricing for major projects has been locked in, and around 95% of Nova Scotia Power's capital spending is sourced from Canadian suppliers. Furthermore, our exposure to Chinese tariffs is minimal, with the only significant impact being our planned energy storage investments at Tampa Electric. Notably, despite tariff exposure, the business case for storage remains strong as batteries remain the most cost-effective solution for our customers. It’s important to mention that our $20 billion 5-year capital plan does not include major investments for data centers. Should new customer opportunities arise, any associated revenue and capital investment would be an upside to our plan. On the regulatory side, we are focused on three key initiatives: the sale of New Mexico Gas, which is progressing through the expected regulatory process with a hearing scheduled for June 23. We anticipate closing in the fourth quarter of 2025. The team at Nova Scotia Power has been collaborating with key stakeholders to establish a path for the utility’s financial stability, allowing it to continue important reliability and resiliency investments for its customers. These regulatory processes require time, and while we wish we had more to report today, we are encouraged by the advancements and expect to provide additional updates in the second quarter. Additionally, the rate application at Peoples Gas is moving forward as anticipated, with a hearing planned for September and a final decision expected in the fourth quarter. I will now turn the floor over to Greg to discuss our financial results.

Greg Blunden, CFO

Thank you, Scott, and thank you all for joining us this morning. Turning to the details of our financial performance. This morning, we reported record first quarter adjusted earnings of $379 million and adjusted earnings per share of $1.28 compared to $216 million and $0.76 in 2024. The robust earnings growth from across the business translated into a meaningful 37% increase in operating cash flow when normalized for fuel and storm deferrals. As you'll recall, our 2024 cash flow was impacted by the $464 million storm deferral at Tampa Electric from the major storms we experienced last fall. Recovery of these costs began on March 1, and we will be collecting them over an 18-month period through August of 2026. And while the typical recovery period for storm costs in Florida is 12 months, we are recovering the cost over 18 months to prioritize affordability for customers by modestly extending the recovery period. This quarter's cash flow growth has delivered important progress towards our credit metric targets with an over 200 basis point improvement in key metrics since the first quarter of 2024, bringing us closer to our 12% target on a trailing 12-month basis. Pro forma with the sale of New Mexico Gas, we are north of this target on the trailing 12-month basis, supporting our confidence in achieving targeted credit metrics at all rating agencies in 2025. We are pleased to see that S&P returned our outlook to stable in recognition of our successful efforts to delever and reflecting their confidence in our cash flow growth for 2025. And while we can't control the timing, we are confident that our actions to date and visible cash flow growth positions us well for Moody's and Fitch to also return our outlook to stable this year. Turning to the drivers of our results. Increased contributions from our regulated utilities, Emera Energy, and lower corporate costs drove a 68% increase in adjusted EPS this quarter. At Tampa Electric, new rates, reflecting the level of capital we've invested on behalf of customers, increased contributions by $0.12 or 85% compared to the first quarter of 2024. For Canadian electric utilities, the recognition of income tax credits related to our battery storage projects and favorable weather increased contributions from Nova Scotia Power, which more than offset the lower contributions from equity investments resulting from the sale of Labrador Island Link last year. Emera Energy had the best quarter in their history with adjusted earnings of $48 million in 2025 compared to $33 million last year. Cold weather brought higher pricing and market volatility, which the business was able to capitalize on. As most of you are aware, we generally see some earnings erosion over the summer because there's less margin opportunity while we are amortizing the cost of transport equally over the year. That said, in light of our strong Q1 performance, we are adjusting Emera Energy's earnings guidance upward for 2025 from the usual $15 million to $30 million to a range of $35 million to $45 million. The strengthening U.S. dollar had a meaningful impact on earnings from our U.S. utilities and Emera Energy, driving a $0.07 increase in adjusted EPS compared to Q1 2024. A net of hedges that are reflected in corporate, this was a $0.05 increase. For the remainder of the year, we continue to expect that every penny change in the Canada U.S. dollar foreign exchange rate will have a roughly $0.01 impact on our adjusted earnings per share. New rates of New Mexico Gas increased contributions from our gas utilities during the quarter, which were partially offset by modestly lower contributions from Peoples Gas. Corporate costs contributed $0.04 to the quarter-over-quarter earnings improvement primarily driven by timing differences in the valuation of long-term compensation and related hedges in Q1 of last year. And finally, contributions from our other electric utilities decreased modestly, driven primarily by higher operating costs. The strategic actions undertaken in 2024 to strengthen our balance sheet and reduce our exposure to variable rate debt established a strong foundation for growth and performance in 2025. As of March 31, only 11% of our debt portfolio is variable rate with 5% at corporate and 6% at our operating companies. Our variable rate exposure to the approximately $1 billion variable rate debt at the holding company level is expected to be repaid with the proceeds from the sale of New Mexico Gas. And at the operating company level, the variable rate debt includes the incremental short-term debt we incurred to finance the storm deferrals at Tampa Electric. And as I mentioned, recovery of those costs began on March 1 and will be covered and repaid over the next 18 months. And with that, I'll now turn the call back to Scott.

Scott Balfour, CEO

Against an uncertain macroeconomic environment, we remain strategically well positioned with our high-quality portfolio of regulated assets to deliver consistent, predictable performance. As always, we're focused on execution to safely deploy over $3 billion in customer-focused capital to prudently operate our utilities and look for cost-saving opportunities as well. With our strong foundation and expert team, our strategy will continue to allow us to deliver value for customers and shareholders. And now we'd like to open the call up for questions from our analysts.

Operator, Operator

Your first question comes from the line of Rob Hope from Scotiabank.

Rob Hope, Analyst

Maybe just start off in New Mexico. Just going through all the stakeholder positions. Anything of note that you see out of the ordinary? And any key steps should we should be watching in the coming weeks and months.

Scott Balfour, CEO

Rob, we are now well into the process, and every regulatory process involves positions from both sides. There are no surprises on our end regarding our current status. The upcoming hearing in June is the next important event to watch, and the team is preparing for it. As I mentioned during the call, we still expect a positive outcome from that process and aim to close in the fourth quarter.

Rob Hope, Analyst

All right. And then maybe moving over to Florida. Can you maybe add a little bit more color on kind of where conversations are regarding data centers for TECO, how the pace has gone and how they are kind of progressing versus expectations?

Scott Balfour, CEO

Archie would you like to address that, please?

Archibald Collins, CIO

Sure. There are many discussions taking place with data center developers, but none have progressed to the point where we are formalizing agreements. However, we remain optimistic that developers will recognize the advantages of establishing operations in the West Central Florida area. We are actively taking steps to support data center development by strengthening our supply chain. The two CTs mentioned by Scott align with this strategy. We continue to feel positive. Recently, there has been some apprehension in the data center community due to uncertainties around interest rates and tariffs, but conversations with our developers are still moving in a positive direction.

Operator, Operator

Your next question comes from the line of Maurice Choy from RBC Capital Markets.

Maurice Choy, Analyst

I want to revisit the topic of tariff exposure. I appreciate the prepared remarks and the direct approach. It seems that a significant portion of your CapEx plan is already secured at a fixed cost. I'm curious if there are any additional areas you're focusing on regarding tariff exposure that weren't covered, or if there are situations where passing costs on to customers might be challenging.

Scott Balfour, CEO

Thanks for the question, Maurice. No, I wouldn't say our anxiety is very high at the moment. And of course, the team is working hard to address sort of tariff exposure, which is not that significant as you would have picked up from our calls. But in an effort to continue to ensure we are managing affordability impacts for customers. It's, of course, at a high priority item for the team. I think the other aspect to tariffs is just supply chain constraints. It's disrupting supply chains and so managing supply chain processes and ensuring we've got good supply chain relationships and alternatives that would be sort of the other key area of focus for the team.

Maurice Choy, Analyst

Maybe just focusing on Canada for a moment here. Last year, we saw quite a number of supportive actions done by various governments for NSPI. Now that we obviously have the Canadian government in place, and there's a lot of discussion about affordability. Just curious as to what you think might emerge here whether as far as provincial or federal level or both together in terms of helping Nova Scotia and ahead of your potential rate case.

Peter Gregg, President, Nova Scotia Power

It's Peter Gregg from Scotia Power. Great question. Early days yet, obviously, with the Federal government. But I do think there's strong alignment between the economic development goals that the Houston government has here in Nova Scotia with what we're hearing are early goals of the Carney administration. I think certainly, Premier has been vocal about his desire to develop offshore wind resources that are quite strong in Nova Scotia. We do have a critical minerals strategy that is developing in Nova Scotia. That's a priority of Prime Minister Carney. So I think there's alignment and good potential opportunity there that we're going to stay close to. But again, saying it's obviously very early days.

Scott Balfour, CEO

And I'd just add encouraged by what would seem to be some momentum and thinking around East-West energy corridors that obviously is something of value and importance, I think, to Canada nationally, but particularly to Atlantic Canada as well. And so those kinds of things, I think, are encouraging. But as Peter said, it's still early days, of course.

Maurice Choy, Analyst

Just on that note about East-West corridor, how do you envision this playing out? And what role, if any, do you think NSPI will play?

Peter Gregg, President, Nova Scotia Power

Yes, it's early. But you remember, we did a lot of work a few years back on what at that point called the Atlantic Loop. So there's been a lot of work done on that, that I think can be refreshed, it probably would not look the same as that is my expectation, but a lot of that thinking has been done. Obviously, our interest at the Nova Scotia Power side would be on the transmission investing in the transmission access of the East-West grid. And if there's going to be development of offshore wind, what's the routing of that, we'd be interested in where that meets land in Nova Scotia, making sure we have the transmission aspects of that. So really, our interest from Nova Scotia Power would be on the transmission side.

Operator, Operator

Your next question comes from the line of Ross Fowler at Bank of America.

Unidentified Analyst, Analyst

Just let me go back to Mexico for a minute. The settlement window has expired, but could you still settle this before the June 23 hearing date? Would that be a goal to get settled before the hearing if that's possible?

Scott Balfour, CEO

Yes, Ross, I mean, look, I mean, the settlement can happen at any time, of course, the leader in the process that the settlement is, it has some risk of impact on schedule. But yes, the settlement can happen at any point in time. And the team remains focused on the upcoming hearing and putting its case in front of the regulator and demonstrating how, in fact, this transaction is beneficial for customers.

Unidentified Analyst, Analyst

Regarding the U.S. listing, are we still planning for it around spring, specifically June 21 this summer? Are we still on track for that?

Scott Balfour, CEO

Even though we're well into the season of spring, we continue to guide that we expect this listing in New York in the spring of 2025.

Unidentified Analyst, Analyst

Given the foreign exchange volatility we've experienced in April, are you considering any changes to your hedging strategy or how you plan to manage hedging moving forward?

Peter Gregg, President, Nova Scotia Power

Ross, it's Gregg. No, at this point in time, the volatility we're experiencing is not uncommon for the Canadian dollar. And at this point in time, we have no plans to change our approach to hedging our U.S. dollar earnings.

Operator, Operator

Your next question comes from the line of Mark Jarvi from CIBC.

Mark Jarvi, Analyst

Maybe going back in New Mexico, just given some of the staff filings that want to see some more commitments from the buyer, would there be a need to amend the application before the hearing? Or do you just try to advocate between yourselves and the buyers on the conditions that have been established on original filing?

Scott Balfour, CEO

Yes. I don't think the intention is to amend the application, Mark. I wouldn't say that. But through the process, of course, we will respond, we will provide rebuttal effectively to the filings of the intervenors to respond to their concerns and that evidence will be part of the deliberations that the commission will consider at the hearing.

Mark Jarvi, Analyst

Okay. Turning to Florida, based on the statistics presented by NextEra FPL regarding customer growth and the labor market, it appears that trends have moderated in Florida. Are you observing the same patterns in your Tampa Electric territories, or is there something different in your areas? If both economic and population growth have slowed, is the data center the only significant factor driving higher rate base growth potential in the next couple of years?

Scott Balfour, CEO

So let me start, and Archie can chime in. I think, obviously, we pay attention to sort of economic growth signals across all our portfolios. And I wouldn't say we've seen anything particularly notable in Florida, but it's certainly something that we're watching for. We're certainly not seeing growth accelerate in this environment, but I would say it's an environment probably in both Canada and the U.S. where because of the broader economic conditions, I think we and everyone are probably paying attention to what's happening in terms of growth drivers, underlying it. We still see the economy in Florida continuing to be strong. We've still seen strong customer growth in the first quarter, not really expecting any change to that, but it's certainly something we're paying attention to. Archie, anything that you'd want to add to that?

Archibald Collins, CIO

I agree with what you said, Scott. I’d like to add that our economic development team is more active than ever, and they are handling a variety of projects beyond just data centers. Numerous companies are interested in relocating to Florida, and there’s a noticeable trend towards onshoring. This creates potential opportunities for us in West Central Florida as well.

Operator, Operator

Your next question comes from the line of Ben Pham from BMO.

Ben Pham, Analyst

First off, on Nova Scotia Power, you put a good quarter, ITCs weather conditions. I'm just wondering with that first quarter behind you. Like how does that reconcile with the ROE language in terms of being below that for the year?

Peter Gregg, President, Nova Scotia Power

Ben, it's Peter. Yes, our outlook for the balance of the year is still consistent with the language we put in there. It's earning just below the allowed rate of return band. So even with a good first quarter, we still think that is the appropriate guidance for the year.

Scott Balfour, CEO

We're not going to provide specific guidance, but we had a return on equity in the mid-8.5% range last year. It's fair to say that we expect it to be somewhat similar this year.

Ben Pham, Analyst

I have a few questions about New Mexico and the commentary from the DOJ, and I'm curious to see how things unfold in the near future. Can you compare this application to your application more than ten years ago? Are there significant differences in the approach, and how do you view the current commission composition compared to the past? Is it more supportive now, or has it stayed the same?

Scott Balfour, CEO

Yes. Well, first of all, the constitution of the commission is different today and that now it is appointed where with our filing, it was elected. I'm not in a place to assess as to whether there's any difference in that. I'd say our experience with this commission right from the beginning has been very balanced outcomes. And our regulatory experience in New Mexico has reflected that, I think. And from our view, I think Bernhard Capital Partners, while they are a private equity owner, we obviously are not. They do operate a number of businesses. They are not sort of a traditional private equity type firm. They have their hands on and are experienced owners and operators of businesses, and they have investments in New Mexico and are very committed to delivering value for customers and also committed to proceed through the regulatory process, demonstrating benefit for customers, and that's what we expect will be evident through the rebuttal testimony that's filed and the hearing in June. Karen, anything that you want to add to that.

Karen Hutt, CEO

No, Scott, I think that's exactly right. We're working through the process. It is a net benefit test that we need to demonstrate in New Mexico, and we're all aware of that and aligned on that. So we continue to engage with all parties and work through the process, and we're confident that we're positioned to be able to achieve those expectations in terms of the regulatory requirements.

Operator, Operator

At this time, there are no further questions. I will return the call to Dave Bezanson for closing remarks.

Dave Bezanson, Host

Thank you, Michael. Thank you all for your interest in Emera. That concludes our call for today. Have a safe day.

Operator, Operator

Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.