HALIFAX, July 27 /CNW/ - (EMA-TSX): Emera Inc.'s consolidated net earnings increased to $34.1 million in Q2 2007, compared to $29.2 million for the same period in 2006. Earnings per share were $0.30 in Q2, 2007 compared to $0.26 in the prior year.
"Emera continued to make progress in the second quarter" said Chris Huskilson, President and Chief Executive Officer of Emera Inc. "NSPI is on track to earn within its allowed range, the National Energy Board (NEB) has approved the Brunswick Pipeline, construction of our international transmission line in Maine is nearing completion and our Bear Swamp facility has made a tangible contribution to earnings. These positive developments prompted our board to increase Emera's annual dividend to $0.91 in the quarter."
Nova Scotia Power Inc., (NSPI) Emera's largest subsidiary, earned $23.9 million in Q2, 2007 compared to $24.3 million in Q2, 2006. Earlier this month, the Nova Scotia Utility and Review Board approved NSPI's proposal to maintain current rates through 2008. "We are pleased to be able to sustain rates at current levels," said Mr. Huskilson, "We know that price stability is important for our customers. The utility has been able to take advantage of a higher Canadian dollar and opportunities to realize favorable 2008 fuel prices." The utility continues to work productively with stakeholders on implementing a fuel adjustment mechanism. A regulatory hearing on this subject, originally scheduled for June, is now expected to be held in the fall.
Bangor Hydro-Electric (BHE) earned $4.8 million in Q2, 2007 compared to $2.7 million in Q2, 2006 primarily due to the capitalization of overhead expenses and allowance for funds used during construction to the Northeast Reliability Interconnect (NRI) transmission project. In addition, BHE began recovering costs associated with the NRI investment in rates in June.
Brunswick Pipeline received its Certificate of Public Convenience and Necessity - an important milestone in the regulatory process. An application for leave to appeal and judicial review has been filed by an intervener. Brunswick Pipeline is opposing this application. The project continues to progress on track and is expected to be in service as planned by the end of 2008.
Emera's other operations contributed $5.4 million to earnings in the second quarter of 2007 compared to $2.2 million in Q2, 2006. The Bear Swamp merchant generating facility's earnings were up significantly year over year because of higher energy and capacity sales. The Maritimes & Northeast Pipeline and Emera Energy Services also reported earnings increases.
Consolidated cash provided by operating activities was $85.8 million in Q2 2007, compared to $71.2 million in Q2 2006.
Teleconference Call
Emera is hosting a teleconference at 3:00 p.m. Atlantic time today (2:00 p.m. Toronto/Montreal/New York; 1:00 p.m. Winnipeg; 11:00 a.m. Vancouver) to discuss the Q2 2007 financial results. Analysts and other interested parties wanting to participate in the call should dial 1-888-575-8232 (in Toronto 416-406-6419) at least 10 minutes prior to the start of the call. No pass code is required. The teleconference will be recorded. If you are unable to join the teleconference live, you can dial for playback toll-free at 1-800-408-3053 (in Toronto 416-695-5800), access code 3227745(number sign) (available until midnight, Friday, August 10, 2007). The teleconference will also be webcast live at www.emera.com and available for playback for one year.
Forward Looking Information
This news release contains forward looking information. Actual future results may differ materially. Additional financial and operational information is filed electronically with various securities commissions in Canada through the System for Electronic Document Analysis and Retrieval (SEDAR).
About Emera Inc.
(EMA-TSX) is an energy and services company with $4.0 billion in assets. Electricity is Emera's core business. The company has two wholly-owned regulated electric utility subsidiaries, Nova Scotia Power Inc. and Bangor Hydro-Electric Company, which together serve 590,000 customers. Emera also owns 19% of St. Lucia Electricity Services Limited, which serves more than 50,000 customers on the Caribbean island of St. Lucia. In addition to its electric utility investments, Emera has a joint venture interest in Bear Swamp, a 600 megawatt pumped storage hydro-electric facility in northern Massachusetts; a 12.9% interest in the Maritimes & Northeast Pipeline; and Emera Energy Services which manages energy assets on behalf of third parties. Visit Emera on the web at www.emera.com.
Management's Discussion & Analysis
As at July 27, 2007
Management's Discussion and Analysis ("MD&A") provides a review of the results of operations of Emera Inc. and its primary subsidiaries and investments during the second quarter of 2007 relative to 2006, year to date 2007 relative to 2006, and its financial position at June 30, 2007 relative to 2006. Certain factors that may affect future operations are also discussed. Such comments will be affected by, and may involve, known and unknown risks and uncertainties that may cause the actual results of the company to be materially different from those expressed or implied. Those risks and uncertainties include, but are not limited to, weather, commodity prices, interest rates, foreign exchange, regulatory requirements and general economic conditions. To enhance shareholders' understanding, certain multi-year historical financial and statistical information is presented.
This discussion and analysis should be read in conjunction with the Emera Inc. unaudited consolidated financial statements and supporting notes as at and for the six month period ended June 30, 2007 and the Emera Inc. MD&A and annual audited consolidated financial statements and supporting notes as at and for the year ended December 31, 2006. Emera follows Canadian Generally Accepted Accounting Principles ("GAAP"). Emera's wholly-owned subsidiary, Nova Scotia Power Inc.'s accounting policies are subject to examination and approval by the Nova Scotia Utility and Review Board. Emera's wholly-owned subsidiary, Bangor Hydro-Electric Company's accounting policies are subject to examination and approval by the Maine Public Utilities Commission and the Federal Energy Regulatory Commission. The rate-regulated accounting policies of Nova Scotia Power and Bangor Hydro may differ from GAAP for non rate-regulated companies.
Throughout this discussion, "Emera Inc." and "Emera" refer to Emera Inc. and all of its consolidated subsidiaries and affiliates.
All amounts are in Canadian dollars ("CAD") except for the Bangor Hydro section of the MD&A, which is reported in US dollars ("USD") unless otherwise stated.
Additional information related to Emera, including the company's Annual Information Form, can be found on SEDAR at www.sedar.com.
Introduction and Strategic Overview
The core business of Emera is electricity. The company owns and operates
two regulated electric utilities in northeastern North America. Both
businesses operate as monopolies in their service territories, and together
typically comprise over 90% of Emera's consolidated earnings:
- Nova Scotia Power Inc. ("NSPI") is an electricity generation,
transmission and distribution company, providing service to the vast
majority of the province of Nova Scotia. NSPI has over $3 billion in
assets, and 475,000 customers.
- Bangor Hydro-Electric Company ("BHE") is an electricity transmission
and distribution company with $610 million in assets serving
115,000 customers in eastern Maine. BHE is a cost of service utility,
with an alternate rate plan ("ARP") for its distribution operations.
The success of Emera's electric utilities is integral to the creation of
shareholder value, providing substantial earnings and cash flow to fund
dividends and reinvestment. Nova Scotia and Maine are mature electricity
markets, with annual demand growth of approximately 2%. Accordingly, Emera
must look beyond its existing regulated electricity business to supplement
organic growth.
Emera's plan for growth leverages its core strength in the electricity
business. Emera will pursue investments in both acquisitions and greenfield
development opportunities in regulated electricity transmission and
distribution and low risk generation. Emera will also capitalize on investment
opportunities in related energy infrastructure businesses appropriate to its
risk profile, where its development, commercial and operational skills are
needed.
Emera's other investments include:
- Emera Energy Services, a wholly owned subsidiary, which purchases and
sells natural gas and electricity on behalf of third parties and
provides related energy asset management services.
- Bear Swamp, a 50/50 joint venture in a 600 megawatt pumped storage
hydro-electric facility in northern Massachusetts.
- A 12.9% interest in the $2 billion, 1,400 kilometer Maritimes &
Northeast Pipeline ("M&NP") that transports Nova Scotia's offshore
natural gas to markets in Maritime Canada and the northeastern United
States.
- Brunswick Pipeline, a proposed 145 kilometer greenfield pipeline
project under development that will deliver natural gas from the
planned Canaport(TM) Liquefied Natural Gas import terminal near
Saint John, New Brunswick, to markets in Canada and the US northeast.
- In January 2007, Emera invested $22 million USD to acquire a 19% equity
interest in St. Lucia Electricity Services Limited ("Lucelec"), a
vertically integrated electric utility serving more than
50,000 customers on the Caribbean island of St. Lucia.
Implementation of New Accounting Standards in Q1 2007
The Canadian Institute of Chartered Accountants ("CICA") has introduced
new classification and measurement requirements for financial instruments,
which Emera adopted in the preparation of its Q1 2007 financial statements.
These changes affect the accounting for several elements of Emera's business
including:
- hedges the company uses to manage risk of fluctuations in commodity
prices, interest rates, and foreign exchange; and
- Nova Scotia Power's natural gas supply contracts.
In some instances, the new accounting requirements result only in a
reclassification of amounts to new balance sheet accounts. For example,
"energy marketing assets and liabilities" have been reclassified as "assets
held for trading". A more significant change is the new requirement to record
the fair value of hedges, and Nova Scotia Power's natural gas contracts as
assets and liabilities on the company's balance sheet. The recognition of
these items beginning January 1, 2007 increased Emera's total assets by
$193.6 million, with a corresponding increase of $193.6 million on the
liabilities and shareholders' equity side of the balance sheet. The net effect
for the six month period ended June 30, 2007 of the implementation of these
changes is a $1.5 million after-tax increase in net earnings.
More detail on the implementation of these new accounting standards is
provided later in this Management's Discussion and Analysis, and in Note 3 to
the financial statements.
Structure of MD&A
This MD&A has been prepared in accordance with the Canadian Securities
Administrators National Instrument 51-102 Management's Discussion & Analysis.
This Management's Discussion and Analysis begins with an overview of
consolidated results; then presents information on the company's two primary
subsidiaries, NSPI and BHE. All other operations, including Emera Energy
Services, Bear Swamp, Brunswick Pipeline, Maritimes & Northeast Pipeline,
Lucelec, and corporate activities are grouped and discussed as "Other".
Significant changes in the consolidated balance sheets, outstanding share
data, liquidity and capital resources, financial and commodity instruments,
transactions with related parties, changes in accounting policies, dividends
and selected quarterly trend information are presented on a consolidated
basis.
EMERA CONSOLIDATED
Q2 Operating Unit Contributions
millions of dollars (except Three months ended Six months ended
earnings per common share) June 30 June 30
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Nova Scotia Power $ 23.9 $ 24.3 $ 50.0 $ 61.7
Bangor Hydro-Electric 4.8 2.7 11.7 6.4
Other 5.4 2.2 12.1 4.7
-------------------------------------------------------------------------
Consolidated net earnings $ 34.1 $ 29.2 $ 73.8 $ 72.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share - basic $ 0.30 $ 0.26 $ 0.66 $ 0.66
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share - diluted $ 0.30 $ 0.26 $ 0.65 $ 0.64
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Review of 2007
Emera Inc.'s consolidated net earnings increased $4.9 million to
$34.1 million in Q2 2007 compared to $29.2 million for the same period in
2006. Year to date Emera's consolidated net earnings increased $1.0 million to
$73.8 million in 2007 compared to $72.8 million in 2006. Highlights of the
changes are summarized in the following table:
Three months Six months
ended ended
millions of dollars June 30 June 30
-------------------------------------------------------------------------
Consolidated net earnings - 2006 $ 29.2 $ 72.8
Decreased net earnings in NSPI due to increased
fuel expense and a new regulatory amortization
partially offset by increased electric revenue
and lower income taxes (0.4) (11.7)
Increased net earnings in Bangor Hydro due to
increased credits and capitalized costs
associated with the Northeast Reliability
Interconnect transmission project 2.1 5.3
Increased net earnings in Other due mainly to
Bear Swamp's increased energy and capacity
sales and the reversal of mark-to-market losses
and M&NP's increased partnership earnings and
capitalization of prior years' expansion
costs in Q1 3.2 7.4
-------------------------------------------------------------------------
Consolidated net earnings - 2007 $ 34.1 $ 73.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Q2 basic earnings per share were $0.30 in 2007 compared to $0.26 in 2006;
and $0.66 year to date in 2007 compared to $0.66 for the first six months of
2006.
NOVA SCOTIA POWER INC.
Overview
NSPI is the primary electricity supplier in Nova Scotia, providing over
95% of electricity generation, transmission and distribution in the province.
Nova Scotia Power is regulated under a cost of service model, with rates set
to recover prudently incurred costs of providing electricity service to
customers, and provide an opportunity to earn a prescribed return on equity.
The company is regulated by the Nova Scotia Utility and Review Board ("UARB").
2007 Rate Decision
In February 2007 the UARB approved an average increase in electricity
rates of 3.8% effective April 1, 2007. The rate increase was part of a
settlement agreement between NSPI and key stakeholders. NSPI's return on
equity range was unchanged at 9.3% to 9.8%.
A central provision of the settlement is an agreement in principle that
the UARB should establish a fuel adjustment mechanism ("FAM") for Nova Scotia
Power to ensure actual fuel costs are recovered from customers. FAM hearings,
which were scheduled to begin June 18, 2007, are now tentatively scheduled for
November 5, 2007. NSPI requested and was granted an adjournment of the June
hearing before the UARB as NSPI believes some outstanding issues can be better
addressed through constructive dialogue among stakeholders. The UARB has
commended this approach.
Review of 2007
NSPI Q2 Net Earnings
millions of dollars (except Three months ended Six months ended
earnings per common share) June 30 June 30
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Electric revenue $268.4 $229.1 $569.7 $490.1
-------------------------------------------------------------------------
Fuel for generation and purchased
power 98.0 58.6 228.9 137.1
Operating, maintenance and general 50.3 51.3 100.6 97.5
Provincial grants and taxes 10.0 10.1 20.1 20.1
Depreciation 32.6 31.9 65.2 63.7
Regulatory amortization 5.6 1.6 7.1 3.1
Other (2.9) (2.8) (5.3) (5.2)
-------------------------------------------------------------------------
Earnings before interest and income
taxes 74.8 78.4 153.1 173.8
Interest 25.8 25.2 50.8 51.0
Amortization of defeasance costs 3.1 3.1 6.3 6.3
-------------------------------------------------------------------------
Earnings before income taxes 45.9 50.1 96.0 116.5
Income taxes 18.7 22.5 39.4 48.2
-------------------------------------------------------------------------
Net earnings before preferred
dividends 27.2 27.6 56.6 68.3
Preferred dividends 3.3 3.3 6.6 6.6
-------------------------------------------------------------------------
Contribution to consolidated net
earnings $ 23.9 $ 24.3 $ 50.0 $ 61.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contribution to consolidated
earnings per common share $ 0.21 $ 0.22 $ 0.45 $ 0.56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NSPI's contribution to consolidated net earnings decreased $0.4 million to
$23.9 million in Q2 2007 compared to $24.3 million in Q2 2006. Year to date
NSPI's contribution to consolidated net earnings decreased $11.7 million to
$50.0 million in 2007 compared to $61.7 million in 2006. Highlights of the
earnings changes are summarized in the following table:
Three months Six months
ended ended
millions of dollars June 30 June 30
-------------------------------------------------------------------------
Contribution to consolidated net
earnings - 2006 $ 24.3 $ 61.7
Increased electric revenue due to an electricity
price increase on April 1, 2007, higher
industrial sales volume, and colder weather year
over year partially offset by lower export sales
volume; year to date increase is also due to
electricity price increase in mid-March 2006 39.3 79.6
Increased fuel expense (39.4) (91.8)
Year to date increased operating expenses due
primarily to higher storm costs and increased
plant maintenance costs 1.0 (3.1)
Increased regulatory amortization due to the start
of a new regulatory amortization on April 1, 2007 (4.0) (4.0)
Decreased income taxes primarily due to
lower taxable income 3.8 8.8
All other (1.1) (1.2)
-------------------------------------------------------------------------
Contribution to consolidated net
earnings - 2007 $ 23.9 $ 50.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Electric Revenue
Q2 Electric Sales Volume Q2 Electric Sales Revenues
Gigawatt hours ("GWh") millions of dollars
----------------------------------- ------------------------------------
2007 2006 2005 2007 2006 2005
----------------------------------- ------------------------------------
Residential 980 890 930 Residential $117.4 $103.3 $99.0
Commercial 752 701 716 Commercial 74.3 67.6 64.0
Industrial 1,044 638 1,060 Industrial 66.9 42.4 58.7
Other 80 202 81 Other 9.8 15.8 8.7
----------------------------------- ------------------------------------
Total 2,856 2,431 2,787 Total $268.4 $229.1 $230.4
----------------------------------- ------------------------------------
----------------------------------- ------------------------------------
Year to Date ("YTD") Electric Sales YTD Electric Sales Revenues
Volume millions of dollars
GWh
----------------------------------- ------------------------------------
2007 2006 2005 2007 2006 2005
----------------------------------- ------------------------------------
Residential 2,310 2,148 2,218 Residential $264.1 $234.3 $222.1
Commercial 1,621 1,538 1,545 Commercial 156.4 143.2 134.5
Industrial 2,056 1,274 2,100 Industrial 129.1 81.5 115.4
Other 173 385 188 Other 20.1 31.1 18.6
----------------------------------- ------------------------------------
Total 6,160 5,345 6,051 Total $569.7 $490.1 $490.6
----------------------------------- ------------------------------------
----------------------------------- ------------------------------------
Q2 Average Revenue / Megawatt hour
("MWh")
-----------------------------------
2007 2006 2005
-----------------------------------
Dollars per
MWh $ 94 $ 94 $ 83
-----------------------------------
-----------------------------------
YTD Average Revenue / MWh
-----------------------------------
2007 2006 2005
-----------------------------------
Dollars per
MWh $ 92 $ 92 $ 81
-----------------------------------
-----------------------------------
Electric revenues increased by $39.3 million to $268.4 million in Q2 2007
from $229.1 million for the same period in 2006. Revenue increases are
substantially due to increased sales volume due to a large industrial customer
returning to operations in late 2006, a 3.8% rate increase effective April 1,
2007, and colder weather year over year, partially offset by lower export
sales.
Year to date electric revenues increased by $79.6 million to
$569.7 million from $490.1 million for the same period in 2006. Revenue
increases are substantially due to the 8.7% rate increase effective March 10,
2006 and a 3.8% rate increase effective April 1, 2007, increased sales volume
due to a large industrial customer returning to operations in late 2006, and
colder weather year over year, partially offset by lower export sales.
The average revenue per MWh is unchanged in the quarter and year to date
reflecting the rate increases noted above, offset by a change in sales mix,
specifically the increase in lower priced industrial sales from the return to
operations of a large industrial customer.
Fuel for Generation and Purchased Power
Q2 Production Volume YTD Production Volume
GWh GWh
----------------------------------- ------------------------------------
2007 2006 2005 2007 2006 2005
----------------------------------- ------------------------------------
Coal & Coal &
petcoke 2,263 2,188 2,199 petcoke 4,750 4,639 4,682
Natural gas 251 69 54 Natural gas 409 140 95
Oil 37 38 253 Oil 466 257 803
Renewable 241 244 306 Renewable 541 560 609
Purchased Purchased
power 166 71 120 power 360 147 284
----------------------------------- ------------------------------------
Total 2,958 2,610 2,932 Total 6,526 5,743 6,473
----------------------------------- ------------------------------------
----------------------------------- ------------------------------------
Purchased power includes 34 GWh of Purchased power includes 84 GWh of
renewables in Q2 2007 renewables in 2007
(2006 - 26 GWh; 2005 - 19 GWh). (2006 - 56 GWh; 2005 - 39 GWh)
Q2 Average Unit Fuel Costs
-----------------------------------
2007 2006 2005
-----------------------------------
Dollars per
MWh $ 33 $ 22 $ 31
-----------------------------------
-----------------------------------
YTD Average Unit Fuel Costs
-----------------------------------
2007 2006 2005
-----------------------------------
Dollars per
MWh $ 35 $ 24 $ 30
-----------------------------------
-----------------------------------
For the three months ended June 30, 2007, fuel for generation and
purchased power increased $39.4 million to $98.0 million compared to
$58.6 million in Q2 2006. Year to date fuel for generation and purchased power
increased $91.8 million to $228.9 million compared to $137.1 million in 2006.
Highlights of the changes are summarized in the following table:
Three months Six months
ended ended
millions of dollars June 30 June 30
-------------------------------------------------------------------------
Fuel for generation and purchased power - 2006 $ 58.6 $ 137.1
Increased sales volume due to the return to
operation of a large industrial customer that
had been shut-down for most of 2006
and colder weather year over year 29.2 68.2
Commodity price increases 8.4 16.9
Decreased net proceeds from the resale of
natural gas 17.3 25.0
Deferral of fuel costs as discussed below (3.0) (3.0)
Decreased export sales volume (4.5) (8.3)
Changes in generation mix (2.6) (3.1)
All other (5.4) (3.9)
-------------------------------------------------------------------------
Fuel for generation and purchased power - 2007 $ 98.0 $ 228.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Q2 and year to date average unit fuel costs increased in 2007 because
sales volume increases necessitated use of higher marginal cost production,
and also due to reductions in natural gas margins.
A provision of the 2007 rate case settlement agreement allows NSPI to
defer, for future recovery in rates, up to $8 million of fuel costs should
natural gas margins be less than $47 million. As of June 30, 2007, NSPI has
deferred $3.0 million.
Regulatory Amortization
The UARB has approved recovery, over eight years, of a $147.1 million
regulatory asset related to pre-2003 income taxes that have been paid, but not
yet recovered from customers; and a $16.7 million regulatory asset related to
Q1 2005 taxes not previously included in rates. Amortization of these
regulatory assets began on April 1, 2007 and increased regulatory amortization
by $4.0 million for the three months and six months ended June 30, 2007.
Outlook
NSPI expects to earn within its allowed regulated return on equity for
2007. In addition, NSPI does not expect to file a general rate application for
2008.
BANGOR HYDRO-ELECTRIC COMPANY
All amounts in the Bangor Hydro section are reported in US dollars unless
otherwise stated.
Overview
BHE's core business is the transmission and distribution ("T&D") of
electricity. Electricity generation is deregulated in Maine, and several
suppliers compete to provide customers with the commodity that is delivered
through the BHE T&D network. BHE is a cost of service utility with an
alternate rate plan for its distribution operations.
The construction of the Northeast Reliability Interconnect ("NRI")
electricity transmission line was approximately 80% complete at the end of the
quarter, and on schedule to be in service in Q4 of this year. In Q2 2007, BHE
filed updates to its total project cost estimate with regulatory agencies and
the Independent System Operator in New England. The filing was based on BHE's
total project cost of $141 million, an approximate 20% increase over earlier
estimates. The change reflects higher costs of mitigating effects of the line
on the Maritimes & Northeast Pipeline, with which it shares a utility
corridor; and increased construction costs due to a wet fall and short winter
construction season. The new cost estimate was incorporated into rates, which
are recognized in purchased power and fuel for generation, effective June 1,
2007.
Review of 2007
Bangor Hydro Q2 Net Earnings
millions of dollars (except Three months ended Six months ended
(earnings per common share) June 30 June 30
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
T&D electric revenues $ 23.9 $ 23.9 $ 50.5 $ 49.8
Resale of purchased power 4.2 4.0 7.8 7.9
-------------------------------------------------------------------------
Total electric revenue 28.1 27.9 58.3 57.7
Purchased power and fuel for
generation 6.0 9.1 14.4 16.5
Operating, maintenance and general 6.7 6.5 12.0 13.8
Property taxes 1.6 1.3 3.0 2.7
Depreciation 3.2 3.2 6.5 6.5
Regulatory amortization 3.8 2.4 6.4 6.2
Other (2.8) (1.2) (5.4) (2.4)
-------------------------------------------------------------------------
Earnings before interest and income
taxes 9.6 6.6 21.4 14.4
Interest 3.3 2.8 6.0 5.2
-------------------------------------------------------------------------
Earnings before income taxes 6.3 3.8 15.4 9.2
Income taxes 1.9 1.4 5.1 3.6
-------------------------------------------------------------------------
Contribution to consolidated net
earnings - USD $ 4.4 $ 2.4 $ 10.3 $ 5.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contribution to consolidated net
earnings - CAD $ 4.8 $ 2.7 $ 11.7 $ 6.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contribution to consolidated
earnings per common share - CAD $ 0.04 $ 0.03 $ 0.10 $0 .06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings weighted average
foreign exchange rate - CAD/USD $ 1.09 $ 1.12 $ 1.14 $1 .14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Bangor Hydro's contribution to consolidated net earnings increased by $2.0
million to $4.4 million in Q2 2007 compared to $2.4 million in Q2 2006. Year
to date Bangor Hydro's contribution to consolidated net earnings increased
$4.7 million to $10.3 million compared to $5.6 million in 2006. Highlights of
the earnings changes are summarized in the following table:
Three months Six months
ended ended
millions of dollars June 30 June 30
-------------------------------------------------------------------------
Contribution to consolidated net earnings - 2006 $ 2.4 $ 5.6
Increased overheads and AFUDC capitalized
primarily as a result of capital expenditures
on the NRI transmission project 1.5 3.4
Decreased purchased power expense due primarily
to the recovery of the NRI project
beginning June 2007 2.1 1.8
All other (1.6) (0.5)
-------------------------------------------------------------------------
Contribution to consolidated net earnings - 2007 $ 4.4 $ 10.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Bangor Hydro's contribution to consolidated net earnings increased
$2.1 million CAD to $4.8 million CAD in Q2 2007 compared to $2.7 million CAD
in Q2 2006, due to the Canadian dollar equivalent of the variances discussed
above partially offset by the $0.1 million effect of the stronger Canadian
dollar. Year to date Bangor Hydro's contribution to consolidated net earnings
increased $5.3 million CAD to $11.7 million CAD compared to $6.4 million CAD
in 2006, due to the Canadian dollar equivalent of the variances discussed
above.
Electric Revenue
Q2 Electric Sales Volume Q2 Electric Sales Revenues
GWh millions of dollars
----------------------------------- ------------------------------------
2007 2006 2005 2007 2006 2005
----------------------------------- ------------------------------------
Residential 136 136 141 Residential $11.6 $11.5 $11.7
Commercial 144 142 146 Commercial 8.8 8.5 8.8
Industrial 85 93 96 Industrial 2.6 2.7 2.1
Other 3 3 3 Other 0.9 1.2 1.4
----------------------------------- ------------------------------------
Total 368 374 386 Total $23.9 $23.9 $24.0
----------------------------------- ------------------------------------
----------------------------------- ------------------------------------
YTD Electric Sales Volume Q2 Electric Sales Revenues
GWh millions of dollars
----------------------------------- ------------------------------------
2007 2006 2005 2007 2006 2005
----------------------------------- ------------------------------------
Residential 296 290 300 Residential $24.9 $24.1 $25.9
Commercial 296 293 296 Commercial 18.0 17.5 18.8
Industrial 174 188 195 Industrial 5.7 5.9 6.0
Other 6 6 6 Other 1.9 2.3 2.6
----------------------------------- ------------------------------------
Total 772 777 797 Total $50.5 $49.8 $53.3
----------------------------------- ------------------------------------
----------------------------------- ------------------------------------
Q2 Average Revenue / MWh
-----------------------------------
2007 2006 2005
-----------------------------------
Dollars per
MWh $ 65 $ 64 $ 62
-----------------------------------
-----------------------------------
YTD Average Revenue / MWh
-----------------------------------
2007 2006 2005
-----------------------------------
Dollars per
MWh $ 65 $ 64 $ 67
-----------------------------------
-----------------------------------
Electric revenues were unchanged at $23.9 million in Q2 2007 and Q2 2006.
Year to date Bangor Hydro's electric revenues increased by $0.7 million to
$50.5 million compared to $49.8 million in 2006 substantially due to increased
residential energy sales due to colder weather year over year.
Purchased Power and Fuel for Generation
Purchased power and fuel for generation expense decreased $3.1 million to
$6.0 million in Q2 2007 compared to $9.1 million in Q2 2006 primarily due to
increased credits from the New England Power Pool associated with the recovery
of NRI project costs starting in June 2007.
Year to date purchased power and fuel for generation expense decreased
$2.1 million to $14.4 million compared to $16.5 million in 2006 for the reason
noted above.
Regulatory Amortization
Regulatory amortization increased $1.4 million to $3.8 million in Q2 2007
compared to $2.4 million in Q2 2006, primarily due to BHE's ability to defer,
for future recovery, the difference between actual stranded cost revenues and
expenses and the amounts incorporated into rates. BHE is currently deferring
net stranded cost revenue thereby increasing regulatory amortization.
Year to date regulatory amortization increased $0.2 million to
$6.4 million compared to $6.2 million in 2006 primarily for the reason noted
above.
OTHER
All activities of Emera other than its two wholly-owned regulated electric
utilities are incorporated into Other, including:
- Emera Energy Services, a wholly owned subsidiary, which purchases and
sells natural gas and electricity on behalf of third parties and
provides related energy asset management services. Emera Energy
Services operates with minimal day-to-day commodity risk exposure.
Volatility in natural gas markets usually results in increased
opportunities for Emera Energy Services.
- Bear Swamp, a 50/50 joint venture in a 600 megawatt pumped storage
hydro-electric facility in northern Massachusetts. Bear Swamp typically
pumps water into its reservoir using lower priced off-peak power, and
uses that hydro capacity to generate electricity during higher priced
on-peak periods.
- Brunswick Pipeline, a proposed 145 kilometer greenfield pipeline
project under development that will deliver natural gas from the
planned Canaport(TM) Liquefied Natural Gas import terminal near Saint
John, New Brunswick, to markets in Canada and the US northeast. The
project is expected to be in service as targeted by the end of 2008.
- A 12.9% interest in the $2 billion, 1,400 kilometer Maritimes
& Northeast Pipeline that transports Nova Scotia's offshore natural gas
to markets in Maritime Canada and the northeastern United States.
- A 19% interest in St. Lucia Electricity Services ("Lucelec"), a
vertically integrated electric utility on the Caribbean Island of
St. Lucia, which was acquired in January 2007. Additional details are
provided below.
- Certain corporate-wide functions such as executive management,
strategic planning, treasury services, tax planning, business
development, and corporate governance; and financing for the
corporation's business outside of its regulated electric utilities.
Investment in St. Lucia Electricity Services
St. Lucia Electricity Services Limited is a vertically integrated electric
utility serving more than 50,000 customers on the Caribbean island of St.
Lucia. Emera acquired a 19% equity interest in Lucelec for $22 million USD in
January 2007.
Lucelec has an exclusive license to generate, transmit and distribute
electricity on the island to 2045. The utility has 66 MW of generating
capacity, primarily oil fired, and 800 kilometers of electricity transmission
and distribution assets. Lucelec is a cost of service utility, with a minimum
rate of return of 10% on a 50% equity base. Emera financed the acquisition
with existing credit facilities. Lucelec is expected to add approximately
$1 million - $2 million to Emera's annual consolidated net earnings.
Emera's strategy recognizes that the Caribbean market has attractive
growth prospects and opportunities for the company to deploy its operational
expertise. This modest investment in Lucelec provides Emera with a low risk
vehicle to assess whether there is broader business potential for the company
in the region, and at the same time, provides immediately accretive and
attractive returns.
Review of 2007
Other Q2 Net Earnings
millions of dollars (except Three months ended Six months ended
earnings per common share) June 30 June 30
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Emera Energy Services earnings
before interest and taxes ("EBIT") $ 2.9 $ 2.0 $ 8.0 $ 5.4
Bear Swamp EBIT 6.3 - 10.0 1.8
M&NP equity earnings 2.0 1.0 5.9 2.5
Lucelec equity earnings 0.6 - 0.8 -
Corporate costs and other (3.7) (1.0) (7.3) (3.5)
-------------------------------------------------------------------------
Earnings before interest and
income taxes 8.1 2.0 17.4 6.2
Interest 2.1 1.3 4.2 3.9
-------------------------------------------------------------------------
Earnings before income taxes 6.0 0.7 13.2 2.3
Income taxes 0.6 (1.5) 1.1 (2.4)
-------------------------------------------------------------------------
Contribution to consolidated net
earnings $ 5.4 $ 2.2 $ 12.1 $ 4.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contribution to consolidated
earnings per common share $ 0.05 $ 0.02 $ 0.11 $ 0.04
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The contribution of Other to consolidated net earnings increased
$3.2 million to $5.4 million in Q2 2007 compared to $2.2 million in Q2 2006.
The year to date contribution of Other to consolidated net earnings increased
$7.4 million to $12.1 million compared to $4.7 million in 2006. Highlights of
the earnings changes are summarized in the following table:
Three months Six months
ended ended
millions of dollars June 30 June 30
-------------------------------------------------------------------------
Contribution to consolidated net earnings - 2006 $ 2.2 $ 4.7
Increased Emera Energy Services EBIT due to
increased business activity 0.9 2.6
Increased Bear Swamp EBIT due to increased
energy and capacity sales and the reversal
of mark-to-market losses 6.3 8.2
Increased M&NP equity earnings due to higher
partnership earnings and the capitalization
of prior years' expansion costs in Q1 1.0 3.4
Equity earnings from Lucelec 0.6 0.8
Increased corporate costs due primarily to
increased business development activity and
the timing of other corporate expenditures (2.7) (3.8)
Increased income taxes related to increased
earnings (2.1) (3.5)
All other (0.8) (0.3)
-------------------------------------------------------------------------
Contribution to consolidated net earnings - 2007 $ 5.4 $ 12.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Bear Swamp
During Q2, Bear Swamp completed a $125 million USD financing using a
senior secured non-revolving credit facility. The five-year credit facility
bears interest at a LIBOR-based facility rate, is secured by the assets of
Bear Swamp, and is due in May 2012. Proceeds of the financing were distributed
equally to Emera and Brookfield Power.
During Q1, Bear Swamp finalized a long-term agreement with the Long Island
Power Authority ("LIPA") providing LIPA with 345 MW of capacity to May 31,
2010 (approximately 55% of Bear Swamp's total capacity); and 100 MW
thereafter, to April 30, 2021. In addition, Bear Swamp will provide LIPA with
12,200 MWh of super-peak and peak energy weekly, (approximately 35% of the
plant's available energy) at a fixed price, with an annual increase, over the
14 year term of the agreement. Bear Swamp has contracted with its parent
companies, Emera and Brookfield Power for the power supply necessary to
produce the requirements of the LIPA agreement.
M&NP
Equity earnings for M&NP increased $1.0 million quarter over quarter to
$2.0 million in Q2 2007 compared to $1.0 million in Q2 2006. Year to date
equity earnings for M&NP increased $3.4 million to $5.9 million compared to
$2.5 million in 2006 primarily due to higher partnership earnings and the
capitalization of prior years' expansion costs previously expensed now that
FERC approval for the expansion has been obtained.
Brunswick Pipeline
The National Energy Board ("NEB") issued a Certificate of Public
Convenience and Necessity on June 11, 2007 reflecting approval for the project
from both the Governor in Council and the NEB. An intervenor in the NEB
hearing in November 2006 has initiated proceedings seeking to have the
decision of the NEB reviewed by the Federal Court of Appeal ("Court"). The
time period within which to initiate proceedings had expired, and the
intervenor has requested an extension from the Court. The project continues to
progress on track with Right of Way acquisition and construction planning and
is expected to be in service as targeted by the end of 2008.
Consolidated Balance Sheets
Significant changes in the consolidated balance sheets between June 30,
2007 and December 31, 2006 include:
Increase
millions of dollars (Decrease) Explanation
-------------------------------------------------------------------------
Assets
Accounts receivable 70.4 Lower accounts receivable securitized,
higher sales due to rate increase and a
higher receivable from a natural gas
supplier in NSPI, partially offset by a
decrease in Emera Energy Services due to
a stronger Canadian dollar and lower
commodity prices.
Derivatives in a valid 17.4 Implementation of new accounting
hedging relationship standards related to financial
(including long-term instruments and hedges. Balance
portion) represents the fair value of NSPI's
hedges.
Held for trading 139.3 Implementation of new accounting
securities (including standards related to financial
long-term portion) instruments and hedges. Balance
represents the fair value of certain of
NSPI's natural gas contracts, trading
instruments in Emera Energy Services,
and instruments held by NSPI that are
not considered valid hedges.
Deferred charges (46.6) As a result of implementing new
accounting standards, reclassification
of deferred financing costs, now netted
against long-term debt, ongoing and new
amortizations, lower accounts receivable
securitized in NSPI, and a stronger
Canadian dollar.
Investments subject to 23.1 Q1 2007 investment in Lucelec.
significant influence
Property, plant and (17.4) Depreciation expense in excess of
equipment and capital additions.
construction work in
progress
-------------------------------------------------------------------------
Liabilities and
Shareholders' Equity
Short-term debt 125.8 Increased issuance of short-term notes
in NSPI and increased borrowings to
finance the NRI project in Bangor Hydro
partially offset by a reduction of
short-term debt in Emera as a result of
cash received from the Bear Swamp debt
issuance.
Accounts payable (54.0) Timing of payments in NSPI, a
and accrued charges stronger Canadian dollar, along with
lower commodity prices in Emera Energy
Services.
Income tax payable (32.5) Increased payments in NSPI.
Derivatives in a valid 58.3 Implementation of new accounting
hedging relationship standards related to financial
(including long-term instruments and hedges. Balance
portion) represents the fair value of NSPI's
hedges.
Held for trading (10.6) Implementation of new accounting
securities (including standards related to financial
long-term portion) instruments and hedges. Balance
represents the fair value of certain of
NSPI's natural gas contracts, trading
instruments in Emera Energy Services,
and instruments held by NSPI that are
not considered valid hedges.
Deferred credits 141.9 Implementation of new accounting
standards. Change primarily represents
the new regulatory liability recognized
in NSPI as a result of fair valuing
certain natural gas contracts.
Long-term debt (12.4) Decreased short-term debt reclassified
(including current to long-term debt and the netting
portion) of deferred financing costs against
long-term debt as a result of
implementing new accounting standards
partially offset the debt issuance in
Bear Swamp.
Accumulated other Implementation of new accounting
comprehensive income (75.3) standards related to financial
instruments, hedges, and comprehensive
income. Balance represents the effective
portion of the fair value of NSPI's
hedges and the cumulative foreign
exchange translation loss on foreign
self-sustaining operations. Change
primarily represents the effect of the
strengthening Canadian dollar relative
to NSPI's existing foreign exchange
hedges and on the company's investment
in Bangor Hydro.
Retained earnings 22.0 Net earnings in excess of dividends
paid.
-------------------------------------------------------------------------
Additional information on the new accounting standards is outlined in the
Changes in Accounting Policies section below.
Outstanding Share Data
Common Share
Capital
Millions of millions of
Issued and Outstanding: Shares dollars
-------------------------------------------------------------------------
January 1, 2006 110.10 $1,039.2
Issued for cash under purchase plans 0.45 8.6
Options exercised under senior management
share option plan 0.38 6.7
Share-based compensation - 0.7
-------------------------------------------------------------------------
December 31, 2006 110.93 $1,055.2
Issued for cash under purchase plans 0.24 4.9
Options exercised under senior management
share option plan 0.07 1.3
Share-based compensation - 0.2
-------------------------------------------------------------------------
June 30, 2007 111.24 $1,061.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at July 13, 2007 the number of issued and outstanding common shares was
111.27 million.
Liquidity and Capital Resources
Emera and Nova Scotia Power's debt shelf prospectuses in the amounts of
$300 million and $400 million respectively expired in April 2007 and will be
renewed by the end of 2007.
During Q2, Bear Swamp completed a $125 million USD financing using a
senior secured non-revolving credit facility. The five-year credit facility
bears interest at a LIBOR-based facility rate, is secured by the assets of
Bear Swamp, and is due in May 2012. Proceeds of the financing were distributed
equally to Emera and Brookfield Power.
Consolidated Cash Flow Highlights
Significant changes in the consolidated cash flow statements between
June 30, 2007 and June 30, 2006 include:
Three months ended June 30
millions of dollars 2007 2006 Explanation
-------------------------------------------------------------------------
Cash and cash equivalents, $ 9.3 $8.8
beginning of period
Provided by (used in):
Operating activities 85.8 71.2 In 2007, cash earnings and
decreased non-cash working
capital.
In 2006, cash earnings
partially offset by increased
non-cash working capital.
Investing activities (59.8) (35.3) In 2007, capital spending,
including NRI and Brunswick
Pipeline projects.
In 2006, capital spending,
including NRI.
Financing activities (27.0) (18.3) In 2007, dividends on common
shares and decreased accounts
receivable securitized,
partially offset by increased
debt levels.
In 2006, dividends on common
shares and decreased accounts
receivable securitized,
partially offset by increased
debt levels.
-------------------------------------------------------------------------
Cash and cash equivalents, $ 8.3 $26.4
end of period
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months ended June 30
millions of dollars 2007 2006 Explanation
-------------------------------------------------------------------------
Cash and cash equivalents, $ 7.6 $21.5
beginning of period
Provided by (used in):
Operating activities 70.6 140.3 In 2007, cash earnings
partially offset by increased
non-cash working capital.
In 2006, cash earnings
partially offset by increased
non-cash working capital.
Investing activities (117.2) (62.6) In 2007, capital spending,
including NRI and Brunswick
Pipeline projects, and
acquisition of 19% interest in
Lucelec.
In 2006, capital spending,
including NRI.
Financing activities 47.3 (72.8) In 2007, increased debt
levels, partially offset by
dividends on common shares and
decreased accounts receivable
securitized.
In 2006, dividends on common
shares and decreased accounts
receivable securitized,
partially offset by increased
debt levels.
-------------------------------------------------------------------------
Cash and cash equivalents, $ 8.3 $26.4
end of period
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial and Commodity Instruments
The company enters into swap contracts on commodities to limit exposure to
(hedge) fluctuations in natural gas and oil prices; foreign exchange forwards,
options and swap contracts to hedge currency rate fluctuations; and interest
rate contracts to hedge interest rate fluctuations. In addition, the company
has contracts for physical purchases and sales of natural gas. Collectively,
these contracts are referred to as derivatives.
Derivatives that meet stringent documentation requirements, and can be
proven to be effective hedges both at the inception and over the term of the
derivative qualify for hedge accounting. That enables amounts paid or received
to be deferred and recognized in earnings in the same period that the related
hedged item is realized.
As a result of implementing new accounting standards related to financial
instruments and hedges in 2007, the company is now recognizing the fair value
of derivatives in valid hedging relationships on its balance sheet. Further,
the effective portion of the hedging relationship is now recognized in other
comprehensive income. Any ineffective portion of the hedging relationship is
recognized in net earnings in the reporting period. In Q2 2007, the total
ineffectiveness recognized by the company was a $0.1 million loss (year to
date 2007 - $0.2 million loss).
Amounts paid or received in connection with derivatives that do not
qualify as hedges are in net earnings in the period.
Derivatives held for trading are recorded on the balance sheet at fair
value, with changes normally recorded in net earnings of the period, unless
deferred as a result of regulatory accounting.
Where the documentation or effectiveness requirements are not met, the
derivative instruments are recognized at fair value with any changes in fair
value recognized in net earnings in the reporting period.
The company has the following categories on the balance sheet related to
derivatives in valid hedging relationships:
Hedging Items Recognized on the Balance Sheet
millions of dollars
-------------------------------------------------------------------------
June 30 December 31
2007 2006
-------------------------------------------------------------------------
Inventory $ 4.9 $ 5.2
Derivatives in a valid hedging relationship (40.9) -
Long-term debt 0.7 -
Deferred charges - 0.9
-------------------------------------------------------------------------
$ (35.3) $ 6.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three and six month periods ended June 30, the impacts of
derivatives in valid hedging relationships recognized in earnings were
recorded in the following categories:
Hedging Impact Recognized
in Earnings Three months ended Six months ended
millions of dollars June 30 June 30
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Fuel and purchased power
(increase) decrease $(14.1) $ 3.0 $(12.7) $ 20.6
Interest expense increase - - (0.2) (0.1)
-------------------------------------------------------------------------
Hedging earnings impact $(14.1) $ 3.0 $(12.9) $ 20.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The company has recognized a net unrealized fair value of held for trading
securities of $151.1 million (December 31, 2006 - $1.2 million) on the balance
sheet. The company has recognized the following realized and unrealized gains
and losses with respect to held for trading securities in earnings:
Held for Trading Securities
Gains (Losses) Recognized in
Earnings Three months ended Six months ended
millions of dollars June 30 June 30
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Electric revenue $ 0.3 $ (0.4) $ 1.1 $ (0.1)
Other revenue 8.0 3.5 16.7 8.6
Fuel and purchased power 1.7 - (2.6) -
Interest 0.1 - - -
-------------------------------------------------------------------------
Held for trading securities
gains (losses) $ 10.1 $ 3.1 $ 15.2 $ 8.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In determining the fair value of derivative financial instruments, the
company has relied on quoted market prices as at the reporting date.
Transactions With Related Parties
In the ordinary course of business, Emera purchased natural gas
transportation capacity totaling $7.6 million (2006 - $7.3 million) during the
three months ended June 30, 2007 and $14.4 million (2006 - $15.7 million)
during the six months ended June 30, 2007 from the Maritimes & Northeast
Pipeline, an investment under significant influence of the company. The amount
is recognized in fuel for generation and purchased power or netted against
energy marketing margin in other revenue, and is measured at the exchange
amount. At June 30, 2007 the amount payable to the related party is
$3.3 million (December 31, 2006 - $3.4 million), is non-interest bearing and
is under normal credit terms.
Changes in Accounting Policies
The Canadian Institute of Chartered Accountants ("CICA") has introduced
new classification and measurement requirements for financial instruments,
including increased use of fair value measurement. These new accounting
standards are incorporated in CICA Handbook Sections 1530 Comprehensive
Income, 3855 Financial Instruments - Recognition and Measurement, and
3865 Hedges, and are effective as of January 1, 2007 for Emera Inc.
In accordance with the new accounting standards, the accounting policy
changes were applied retroactively without restatement of prior periods. The
following provides more information on each standard.
Comprehensive Income
As a result of the recently issued standard, a new item, accumulated other
comprehensive income ("AOCI"), is recognized in the shareholders' equity
section of the consolidated balance sheets. AOCI includes the unrealized
foreign exchange translation adjustments on the company's self-sustaining
foreign operations, the effective portion of changes in fair value of
derivatives meeting the requirements for cash flow hedges, and unrealized
gains and losses on financial assets classified as available-for-sale.
Financial Instruments - Recognition and Measurement
According to the new standard, financial assets are now classified as
loans and receivables, held for trading, available for sale, or held to
maturity. Financial liabilities are classified as either held for trading, or
other than held for trading. The financial assets and liabilities are subject
to different methods of measurement and classification in the financial
statements, as set out in the accompanying table:
-------------------------------------------------------------------------
Financial Instrument Measured at Classified in
-------------------------------------------------------------------------
- Loans and receivables Amortized cost N/A
- Held to maturity financial
assets
- Other than held for trading
financial liabilities
-------------------------------------------------------------------------
- Held for trading financial Fair value Net earnings unless
assets and liabilities deferral permitted under
regulatory accounting
-------------------------------------------------------------------------
- Available for sale financial Fair value Other comprehensive
assets income
-------------------------------------------------------------------------
In accordance with the new standard, transaction costs associated with the
issuance of long-term debt are included in long-term debt and amortized using
the effective interest method.
Hedges
The new standard outlines the criteria for applying hedge accounting to
cash flow hedges, fair value hedges, and hedging foreign currency fluctuations
on self-sustaining foreign operations.
Cash flow hedges are recognized on the balance sheet at fair value with
the effective portion of the hedging relationship recognized in other
comprehensive income. Any ineffective portion of the cash flow hedge is
recognized in net earnings. Amounts recognized in AOCI are reclassified to net
income in the same periods in which the hedged item is recognized in net
earnings.
Fair value hedges and the related hedged items are recognized on the
balance sheet at fair value with any changes in fair value recognized in net
income. To the extent the fair value hedge is effective, the changes in fair
value of the hedge and the hedged item will offset each other.
Hedges of self-sustaining foreign operations are recognized at fair value
with any changes in fair value recognized in other comprehensive income.
Accounting for the impact of rate-regulation:
In accordance with the new accounting standards as outlined above, Nova
Scotia Power determined that its contracts for the purchase or sale of natural
gas for its Tufts Cove generating station ("TUC") should be considered
derivative financial instruments and accordingly recognized at fair value as a
held for trading ("HFT") asset or liability as applicable. This reflects
NSPI's history of buying and reselling any natural gas not used in the
production of electricity at TUC.
Changes in the fair value of HFT assets and liabilities are recognized in
net earnings. In accordance with Nova Scotia Power's accounting policy
covering physical and financial contracts relating to fuel at TUC, NSPI has
deferred any changes in fair value to a regulatory asset or liability as
appropriate, which are reflected in deferred assets or credits. Absent the
accounting policy, which has been approved by the UARB, NSPI's year to date
net earnings for 2007 would have been $22.3 million ($13.8 million after-tax)
lower.
Details of the amounts recognized upon implementation of the new
accounting standards, and the effect on the consolidated balance sheet as at
January 1, 2007 are summarized below:
Consolidated
Balance Sheet Balance Before Effect of Balance After
Selected Information Implementation Implementation Implementation
millions of dollars Adjustment Adjustment Adjustment
-------------------------------------------------------------------------
Current assets
Energy marketing assets $ 37.3 $(37.3) -
Derivatives in valid
hedging relationship - 13.9 $ 13.9
Held for trading securities - 76.0 76.0
Energy marketing assets 2.0 (2.0) -
Derivatives in a valid
hedging relationship - 17.9 17.9
Held for trading securities - 136.4 136.4
Deferred charges 468.2 (11.3) 456.9
Investments 98.5 (98.5) -
Investments subject to
significant influence - 98.5 98.5
-------------------------------------------------------------------------
$193.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current liabilities
Current portion of
long-term debt $ 3.4 $ (0.2) $ 3.2
Energy marketing liabilities 36.7 (36.7) -
Derivatives in a valid hedging
relationship - 26.6 26.6
Held for trading securities - 39.7 39.7
Energy marketing liabilities 1.4 (1.4) -
Derivatives in a valid
hedging relationship - 10.6 10.6
Held for trading securities - 2.6 2.6
Deferred credits 66.1 173.1 239.2
Long-term debt 1,657.4 (12.7) 1,644.7
Shareholders' equity
Foreign exchange translation
adjustment (100.2) 100.2 -
Accumulated other
comprehensive income - (105.5) (105.5)
Retained earnings 450.9 (2.7) 448.2
-------------------------------------------------------------------------
$193.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The effect on the January 1, 2007 balances can be further explained as
follows:
Energy marketing assets and liabilities: The balances have been
reclassified to held for trading securities.
Derivatives in a valid hedging relationship: This new account represents
the fair value of Nova Scotia Power's hedges. These derivatives are all
designated as hedging future expected cash flows.
Held for trading securities: This new account includes the fair value of
certain of Nova Scotia Power's natural gas contracts, amounts previously
recognized as energy marketing assets and liabilities, and the fair value of
any derivatives that are not considered valid hedges.
Deferred charges: The adjustment represents the reclassification of
deferred financing costs which are now netted against the related debt,
partially offset by the regulatory asset resulting from the fair value
recognition of certain of Nova Scotia Power's natural gas contracts.
Investments: The adjustment represents the reclassification of equity
accounted investments to investments subject to significant influence.
Investments subject to significant influence: This new account represents
the reclassification of equity accounted investments from the investments
account as noted above.
Deferred credits: The adjustment represents the regulatory liability
resulting from the fair value recognition of certain of Nova Scotia Power's
natural gas contracts.
Long-term debt (including current portion): The adjustment represents the
netting of deferred financing costs against the related debt.
Foreign exchange translation adjustment: The adjustment represents the
reclassification of foreign exchange losses on self-sustaining foreign
operations to accumulated other comprehensive income.
Accumulated other comprehensive income: The adjustment represents the
effective portion of the fair value of Nova Scotia Power's hedges and the
cumulative foreign exchange loss on self-sustaining foreign operations.
Retained earnings: The adjustment represents the fair value of Bear
Swamp's interim LIPA contract.
As a result of implementing the accounting policy changes, year to date
net earnings for 2007 have increased by $2.5 million ($1.5 million after-tax),
which represents the change in fair value of Bear Swamp's interim LIPA
contract and the ineffective portion of the company's hedges. There has been
no effect on the consolidated statement of changes of cash flow.
The fair value of derivatives held in a valid hedging relationship and
held for trading securities are estimated by obtaining prevailing market rates
from investment dealers.
Future Accounting Policy Changes
The CICA has issued new accounting standards 1535 Capital Disclosures,
3031 Inventories, 3862 Financial Instruments - Disclosures, and 3863 Financial
Instruments - Presentation which are applicable to Emera's 2008 fiscal year.
The following provides more information on each new accounting standard.
Capital Disclosures: This new standard requires disclosure of the
company's objectives, policies, and processes for managing capital;
quantitative data about what the company regards as capital; whether the
company has complied with capital requirements; and, if the company has not
complied, the consequences of such non-compliance. The new accounting standard
covers disclosure only and will have no effect on the financial results of the
company.
Inventories: The new standard provides more guidance on the measurement
and disclosure requirements for inventories than the previous standard, 3030
Inventories. Specifically, the new standard requires that inventories be
measured at the lower of cost and net realizable value, and provides more
guidance on the determination of cost and its subsequent recognition as an
expense, including any write-down to net realizable value. The company is
assessing the effect of the new standard on its financial results but does not
anticipate any material effect on its results.
Financial Instruments - Disclosures and Financial Instruments -
Presentation: These new standards replace accounting standard 3861 Financial
Instruments - Disclosure and Presentation. Presentation requirements have not
changed. Enhanced disclosure is required to assist users of the financial
statements in evaluating the significance of financial instruments on the
company's financial position and performance, including qualitative and
quantitative information about the company's exposure to risks arising from
financial instruments. The new accounting standards cover disclosure only and
will have no effect on the financial results of the company.
Dividends
In July 2007, the Board of Directors approved a quarterly dividend of
$0.2275 per common share, reflecting an increase on an annualized basis to
$0.91 from $0.89.
Summary of Quarterly Reports
For the quarter ended
millions of dollars (except earnings per common share)
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3
2007 2007 2006 2006
-------------------------------------------------------------------------
Total revenues $323.3 $359.9 $307.0 $272.4
Net earnings from continuing
operations $ 34.1 $ 39.7 $ 33.5 $ 19.5
Net earnings applicable to common
shares $ 34.1 $ 39.7 $ 33.5 $ 19.5
Earnings per common share - basic:
Continuing operations $ 0.30 $ 0.36 $ 0.30 $ 0.18
Discontinued operations - - - -
-------------------------------------------------------------------------
$ 0.30 $ 0.36 $ 0.30 $ 0.18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share -
diluted:
Continuing operations $ 0.30 $ 0.35 $ 0.30 $ 0.18
Discontinued operations - - - -
-------------------------------------------------------------------------
$ 0.30 $ 0.35 $ 0.30 $ 0.18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3
2006 2006 2005 2005
-------------------------------------------------------------------------
Total revenues $275.9 $310.7 $297.1 $281.1
Net earnings from continuing
operations $ 29.2 $ 43.6 $ 37.7 $ 18.1
net earnings applicable to common
shares $ 29.2 $ 43.6 $ 37.7 $ 15.9
Earnings per common share - basic:
Continuing operations $ 0.26 $ 0.40 $ 0.34 $ 0.16
Discontinued operations - - - ( 0.02)
-------------------------------------------------------------------------
$ 0.26 $ 0.40 $ 0.34 $ 0.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share -
diluted:
Continuing operations $ 0.26 $ 0.38 $ 0.34 $ 0.16
Discontinued operations - - - ( 0.02)
-------------------------------------------------------------------------
$ 0.26 $ 0.38 $ 0.34 $ 0.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarterly total revenues and net earnings applicable to common shares are
affected by seasonality, with Q1 and Q4 the strongest periods, reflecting
colder weather and fewer daylight hours at those times of year.
Financial Statements
Consolidated Statements of Earnings (Unaudited)
-------------------------------------------------------------------------
For the
millions of dollars (except Three months ended Six months ended
earnings per common share) June 30 June 30
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue
Electric $309.4 $267.6 $657.2 $569.3
Other 13.9 8.3 26.0 17.3
-------------------------------------------------------------------------
323.3 275.9 683.2 586.6
-------------------------------------------------------------------------
Cost of operations
Fuel for generation and
purchased power (note 6) 110.6 74.1 258.9 164.2
Operating, maintenance, and
general 65.2 64.1 128.4 124.4
Provincial, state, and municipal
taxes 12.3 12.0 24.5 24.1
Depreciation 37.4 36.1 74.4 72.2
Regulatory amortization 9.8 4.3 14.4 10.2
Allowance for funds used during
construction (3.0) (1.3) (5.6) (2.3)
-------------------------------------------------------------------------
232.3 189.3 495.0 392.8
-------------------------------------------------------------------------
Earnings from operations 91.0 86.6 188.2 193.8
Equity earnings 2.6 1.0 6.7 2.5
-------------------------------------------------------------------------
Earnings before interest and income
taxes 93.6 87.6 194.9 196.3
Interest (note 8) 31.6 29.4 61.8 60.7
Amortization of defeasance costs 3.1 3.1 6.3 6.3
-------------------------------------------------------------------------
Earnings before income taxes 58.9 55.1 126.8 129.3
Income taxes 21.4 22.5 46.3 49.8
-------------------------------------------------------------------------
Net earnings before non-controlling
interest 37.5 32.6 80.5 79.5
Non-controlling interest 3.4 3.4 6.7 6.7
Net earnings applicable to common
shares $ 34.1 $ 29.2 $ 73.8 $ 72.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share - basic $ 0.30 $ 0.26 $ 0.66 $ 0.66
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share - diluted $ 0.30 $ 0.26 $ 0.65 $ 0.64
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the unaudited consolidated financial
statements.
Weighted average number of common
shares outstanding (millions)
- basic 111.2 110.4 111.1 110.3
- diluted 124.4 110.4 124.3 123.7
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
As at June 30 December 31
millions of dollars 2007 2006
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 8.3 $ 7.6
Restricted cash 6.9 11.9
Accounts receivable 324.0 253.6
Dividends receivable 0.7 -
Income tax receivable 6.6 5.3
Inventory 108.6 113.6
Prepaid expenses 54.5 53.9
Future income tax assets 9.2 18.9
Derivatives in a valid hedging relationship
(note 3) 16.5 -
Held for trading securities (note 3) 61.9 37.3
-------------------------------------------------------------------------
597.2 502.1
-------------------------------------------------------------------------
Derivatives in a valid hedging relationship
(note 3) 0.9 -
-------------------------------------------------------------------------
Held for trading securities (note 3) 116.7 2.0
-------------------------------------------------------------------------
Deferred charges (note 3) 421.6 468.2
-------------------------------------------------------------------------
Future income tax assets 16.1 10.0
-------------------------------------------------------------------------
Goodwill 89.0 97.1
-------------------------------------------------------------------------
Investments subject to significant influence
(note 3) 121.6 98.5
-------------------------------------------------------------------------
Property, plant and equipment 2,704.9 2,756.4
Construction work in progress 159.6 125.5
-------------------------------------------------------------------------
2,864.5 2,881.9
-------------------------------------------------------------------------
$4,227.6 $4,059.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt
(notes 3 and 9) $ 2.9 $ 3.4
Short-term debt 259.0 133.2
Accounts payable and accrued charges 232.0 286.0
Income tax payable 6.8 39.3
Dividends payable 3.2 3.2
Derivatives in a valid hedging relationship
(note 3) 28.7 -
Held for trading securities (note 3) 20.5 36.7
-------------------------------------------------------------------------
553.1 501.8
-------------------------------------------------------------------------
Derivatives in a valid hedging relationship (note 3) 29.6 -
-------------------------------------------------------------------------
Held for trading securities (note 3) 7.0 1.4
-------------------------------------------------------------------------
Future income tax liabilities 82.2 86.2
-------------------------------------------------------------------------
Asset retirement obligations 80.1 78.1
-------------------------------------------------------------------------
Deferred credits (note 3) 208.0 66.1
-------------------------------------------------------------------------
Long-term debt (notes 3 and 9) 1,645.5 1,657.4
-------------------------------------------------------------------------
Non-controlling interest 260.6 260.7
-------------------------------------------------------------------------
Shareholders' equity
Common shares (note 10) 1,061.6 1,055.2
Contributed surplus 2.5 2.2
Accumulated other comprehensive income (note 3) (175.5) (100.2)
Retained earnings 472.9 450.9
-------------------------------------------------------------------------
1,361.5 1,408.1
-------------------------------------------------------------------------
$4,227.6 $4,059.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the unaudited consolidated financial
statements.
Approved on behalf of the Board of Directors
"Derek Oland" "Christopher Huskilson"
Derek Oland Christopher Huskilson
Chairman President and Chief Executive Officer
Consolidated Statements of Cash Flow (Unaudited)
-------------------------------------------------------------------------
For the Three months ended Six months ended
millions of dollars June 30 June 30
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Operating activities
Net earnings before non-controlling
interest $ 37.5 $ 32.6 $ 80.5 $ 79.5
Non-cash items:
Depreciation 37.4 36.1 74.4 72.2
Amortization of deferred charges 3.5 3.3 7.0 6.8
Equity earnings (2.6) (1.0) (6.7) (2.5)
Regulatory amortization 9.8 4.3 14.4 10.2
Allowance for funds used during
construction (3.0) (1.3) (5.6) (2.3)
Future income taxes (0.3) 0.8 3.9 4.0
Post-retirement benefits 3.8 3.2 7.1 6.9
Other non-cash operating items (8.7) (1.9) (6.9) 0.8
Other cash operating items (1.0) 1.7 1.2 0.5
-------------------------------------------------------------------------
76.4 77.8 169.3 176.1
Change in non-cash operating working
capital 9.4 (6.6) (98.7) (35.8)
-------------------------------------------------------------------------
Net cash provided by operating
activities 85.8 71.2 70.6 140.3
-------------------------------------------------------------------------
Investing activities
Property, plant and equipment (55.2) (37.6) (95.0) (56.8)
Acquisition (note 4) - - (25.7) -
Retirement spending net of salvage (0.9) (0.8) (1.5) (1.6)
(Increase) decrease in restricted
cash (3.7) 2.0 5.0 (4.2)
Other investing activities - 1.1 - -
-------------------------------------------------------------------------
Net cash used in investing
activities (59.8) (35.3) (117.2) (62.6)
-------------------------------------------------------------------------
Financing activities
Retirement of long-term debt (0.4) (150.2) (1.0) (150.8)
Issuance of long-term debt 66.9 40.0 66.9 40.0
(Decrease) increase in short-term
debt (43.4) 139.0 87.4 118.3
Issuance of common shares 3.4 2.4 6.2 6.1
Dividends on common shares (24.7) (24.6) (49.4) (49.1)
Dividends paid by subsidiaries to
non-controlling interest (3.4) (3.4) (6.7) (6.7)
Accounts receivable securitization (25.0) (20.0) (55.0) (30.0)
Other financing (0.4) (1.5) (1.1) (0.6)
-------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (27.0) (18.3) 47.3 (72.8)
-------------------------------------------------------------------------
(Decrease) increase in cash and
cash equivalents (1.0) 17.6 0.7 4.9
Cash and cash equivalents,
beginning of period 9.3 8.8 7.6 21.5
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 8.3 $ 26.4 $ 8.3 $ 26.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents
consists of:
Cash $ 4.8 $ 26.0 $ 4.8 $ 26.0
Cash equivalents 3.5 0.4 3.5 0.4
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 8.3 $ 26.4 $ 8.3 $ 26.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental disclosure of cash
paid:
Interest $ 30.4 $ 28.8 $ 61.5 $ 59.3
Income and capital taxes $ 34.3 $ 19.1 $ 81.4 $ 32.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the unaudited consolidated financial
statements.
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
-------------------------------------------------------------------------
For the six months Accu-
ended June 30, 2007 mulated
millions of dollars Other
Compre- Total
Contri- hensive AOCI and
Common buted Income Retained Retained
Shares Surplus ("AOCI") Earnings Earnings
-------------------------------------------------------------------------
Balance, December 31,
2006 $1,055.2 $ 2.2 $ (100.2) $ 450.9 $ 350.7
Implementation
adjustment (note 3) - - (5.3) (2.7) (8.0)
Comprehensive Income:
Net earnings applicable
to common shares - - - 73.8 73.8
Net loss on derivatives
in a valid hedging
relationship - - (40.1) - (40.1)
Reclassification of
hedging losses
included in income - - (0.4) - (0.4)
Reclassification of
hedging gains
included in inventory - - 4.9 - 4.9
Unrealized loss on
translation of
self-sustaining
foreign operations - - (34.5) - (34.5)
Other - - 0.1 - 0.1
-------------------------------------------------------------------------
Total comprehensive
income - - (70.0) 73.8 3.8
-------------------------------------------------------------------------
Dividends declared on
common shares - - - (49.1) (49.1)
Common shares issued
under purchase plans 4.9 - - - -
Senior management stock
options exercised 1.3 - - - -
Stock option expense - 0.3 - - -
Other share-based
compensation 0.2 - - - -
-------------------------------------------------------------------------
Balance, June 30, 2007 $1,061.6 $ 2.5 $ (175.5) $ 472.9 $ 297.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months Total
ended June 30, 2006 Contri- AOCI and
millions of dollars Common buted Retained Retained
Shares Surplus AOCI Earnings Earnings
-------------------------------------------------------------------------
Balance, December 31,
2005 $1,039.2 $ 1.8 $ (98.2) $ 423.4 $ 325.2
Comprehensive Income:
Net earnings applicable
to common shares - - - 72.8 72.8
Unrealized loss on
translation of
self-sustaining
foreign operations - - (18.4) - (18.4)
-------------------------------------------------------------------------
Total comprehensive
income - - (18.4) 72.8 54.4
-------------------------------------------------------------------------
Dividends declared on
common shares - - - (49.1) (49.1)
Common shares issued
under purchase plans 4.3 - - - -
Senior management stock
options exercised 1.9 (0.1) - - -
Stock option expense - 0.4 - - -
Other share-based
compensation 0.1 - - - -
-------------------------------------------------------------------------
Balance, June 30, 2006 $1,045.5 $ 2.1 $ (116.6) $ 447.1 $ 330.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the unaudited consolidated financial
statements.
Notes to the Interim Unaudited Consolidated Financial Statements
June 30, 2007
1. Basis of Presentation
The disclosures in these unaudited interim consolidated financial
statements do not conform in all respects to the requirements of Canadian
Generally Accepted Accounting Principles for annual audited financial
statements and should be read in conjunction with Emera Inc.'s annual
consolidated financial statements as at and for the year ended December 31,
2006.
These consolidated financial statements follow the same accounting
policies and methods of computation as Emera Inc.'s annual audited
consolidated financial statements as at and for the year ended December 31,
2006, with the exception of the accounting policy changes disclosed in Note 3.
2. Seasonal Nature of Operations
Interim results are not necessarily indicative of results for the full
year due primarily to seasonal factors. Sales and related production vary
significantly over the year, with Q1 and Q4, the strongest periods, reflecting
colder weather and fewer daylight hours in the winter season.
3. Changes in Accounting Policy
The Canadian Institute of Chartered Accountants ("CICA") has issued new
accounting standards 1530 Comprehensive Income, 3855 Financial Instruments -
Recognition and Measurement, and 3865 Hedges, which were applicable to the
Company effective January 1, 2007. In accordance with the new accounting
standards, the accounting policy changes were applied retroactively without
restatement of prior periods. The following provides more information on each
standard.
Comprehensive Income
As a result of the recently issued standard, a new item, accumulated other
comprehensive income ("AOCI"), is recognized in the shareholders' equity
section of the consolidated balance sheets. AOCI includes the unrealized
foreign exchange translation adjustments on the company's self-sustaining
foreign operations, the effective portion of changes in fair value of
derivatives meeting the requirements for cash flow hedges, and unrealized
gains and losses on financial assets classified as available-for-sale.
Financial Instruments - Recognition and Measurement
According to the new standard, financial assets are now classified as
loans and receivables, held for trading, available for sale, or held to
maturity. Financial liabilities are classified as either held for trading, or
other than held for trading. The financial assets and liabilities are subject
to different methods of measurement and classification in the financial
statements as follows:
-------------------------------------------------------------------------
Financial Instrument Measured at Classified in
-------------------------------------------------------------------------
- Loans and receivables Amortized cost N/A
- Held to maturity financial
assets
- Other than held for trading
financial liabilities
-------------------------------------------------------------------------
- Held for trading financial Fair value Net earnings unless
assets and liabilities deferral permitted under
regulatory accounting
-------------------------------------------------------------------------
- Available for sale financial Fair value Other comprehensive
assets income
-------------------------------------------------------------------------
In accordance with the new standard, transaction costs associated with the
issuance of long-term debt are included in long-term debt and amortized using
the effective interest method.
The Company has chosen January 1, 2003 as the transition date for embedded
derivatives and as a result, embedded derivatives existing prior to the
transition date are not reflected as separate assets and liabilities on the
balance sheet. An embedded derivative is a component of a contract with
characteristics similar to a derivative.
Hedges
The new standard outlines the criteria for applying hedge accounting to
cash flow hedges, fair value hedges, and hedging foreign currency fluctuations
on self-sustaining foreign operations.
Cash flow hedges are recognized on the balance sheet at fair value with
the effective portion of the hedging relationship recognized in other
comprehensive income. Any ineffective portion of the cash flow hedge is
recognized in net earnings. Amounts recognized in AOCI are reclassified to net
income in the same periods in which the hedged item is recognized in net
earnings.
Fair value hedges and the related hedged items are recognized on the
balance sheet at fair value with any changes in fair value recognized in net
income. To the extent the fair value hedge is effective, the changes in fair
value of the hedge and the hedged item will offset each other.
Hedges of self-sustaining foreign operations are recognized at fair value
with any changes in fair value recognized in other comprehensive income.
Accounting for the impact of rate-regulation:
In accordance with the new accounting standards as outlined above, Nova
Scotia Power determined that its contracts for the purchase or sale of natural
gas for its Tufts Cove generating station ("TUC") should be considered
derivative financial instruments and accordingly recognized at fair value as a
held for trading ("HFT") asset or liability as applicable. This reflects
NSPI's history of buying and reselling any natural gas not used in the
production of electricity at TUC.
Changes in the fair value of HFT assets and liabilities are recognized in
net earnings. In accordance with Nova Scotia Power's accounting policy
covering physical and financial contracts relating to fuel at TUC, NSPI has
deferred any changes in fair value to a regulatory asset or liability as
appropriate, which are reflected in deferred assets or credits. Absent the
accounting policy, which has been approved by the UARB, NSPI's year to date
net earnings for 2007 would have been $22.3 million ($13.8 million after-tax)
lower.
Details of the amounts recognized upon implementation of the new
accounting standards, and the effect on the consolidated balance sheet as at
January 1, 2007 are summarized below:
Consolidated
Balance Sheet Balance Before Effect of Balance After
Selected Information Implementation Implementation Implementation
millions of dollars Adjustment Adjustment Adjustment
-------------------------------------------------------------------------
Current assets
Energy marketing assets $ 37.3 $(37.3) -
Derivatives held in
valid hedging
relationship - 13.9 $ 13.9
Held for trading
securities - 76.0 76.0
Energy marketing assets 2.0 (2.0) -
Derivatives in a valid
hedging relationship - 17.9 17.9
Held for trading securities - 136.4 136.4
Deferred charges 468.2 (11.3) 456.9
Investments 98.5 (98.5) -
Investments subject to
significant influence - 98.5 98.5
-------------------------------------------------------------------------
$193.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current liabilities
Current portion of
long-term debt $ 3.4 $ (0.2) $ 3.2
Energy marketing
liabilities 36.7 (36.7) -
Derivatives held in a
valid hedging
relationship - 26.6 26.6
Held for trading
securities - 39.7 39.7
Energy marketing
liabilities 1.4 (1.4) -
Derivatives in a valid
hedging relationship - 10.6 10.6
Held for trading securities - 2.6 2.6
Deferred credits 66.1 173.1 239.2
Long-term debt 1,657.4 (12.7) 1,644.7
Shareholders' equity
Foreign exchange
translation adjustment (100.2) 100.2 -
Accumulated other
comprehensive income - (105.5) (105.5)
Retained earnings 450.9 (2.7) 448.2
-------------------------------------------------------------------------
$193.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The effect on the January 1, 2007 balances can be further explained as
follows:
Energy marketing assets and liabilities: The balances have been
reclassified to held for trading securities.
Derivatives in a valid hedging relationship: This new account represents
the fair value of Nova Scotia Power's hedges. These derivatives are all
designated as hedging future expected cash flows.
Held for trading securities: The new account includes the fair value of
certain of Nova Scotia Power's natural gas contracts, amounts previously
recognized as energy marketing assets and liabilities, and the fair value of
any derivatives that are not valid hedges.
Deferred charges: The adjustment represents the reclassification of
deferred financing costs which are now netted against the related debt,
partially offset by the regulatory asset resulting from the fair value
recognition of certain of Nova Scotia Power's natural gas contracts.
Investments: The adjustment represents the reclassification of equity
accounted investments to investments subject to significant influence.
Investments subject to significant influence: This new account represents
the reclassification of equity accounted investments from the investments
account as noted above.
Deferred credits: The adjustment represents the regulatory liability
resulting from the fair value recognition of certain of Nova Scotia Power's
natural gas contracts.
Long-term debt (including current portion): The adjustment represents the
netting of deferred financing costs against the related debt.
Foreign exchange translation adjustment: The adjustment represents the
reclassification of foreign exchange losses on self-sustaining foreign
operations to accumulated other comprehensive income.
Accumulated other comprehensive income: The adjustment represents the
effective portion of the fair value of Nova Scotia Power's hedges, and the
cumulative foreign exchange loss on self-sustaining foreign operations.
Retained earnings: The adjustment represents the fair value of Bear
Swamp's interim contract with the Long Island Power Authority ("LIPA").
As a result of implementing the accounting policy changes, net earnings
for 2007 have increased by $2.5 million ($1.5 million after-tax), which
represents the change in fair value of Bear Swamp's interim LIPA contract and
the ineffective portion of the Company's hedges.
For the six month period ended June 30, 2007 the pre-tax impact of hedges
recognized in earnings was a $12.9 million loss (2006 - $20.5 million gain).
The fair value of derivatives in a valid hedging relationship and held for
trading securities are estimated by obtaining prevailing market rates from
investment dealers.
Future Accounting Policy Changes
The CICA has issued new accounting standards 1535 Capital Disclosures,
3031 Inventories, 3862 Financial Instruments - Disclosures, and 3863 Financial
Instruments - Presentation which are applicable to Emera's 2008 fiscal year.
The following provides more information on each new accounting standard.
Capital Disclosures: This new standard requires disclosure of the
company's objectives, policies, and processes for managing capital;
quantitative data about what the company regards as capital; whether the
company has complied with any capital requirements; and, if the company has
not complied, the consequences of such non-compliance. The new accounting
standard covers disclosure only and will have no effect on the financial
results of the company.
Inventories: The new standard provides more guidance on the measurement
and disclosure requirements for inventories than the previous standard, 3030
Inventories. Specifically, the new standard requires that inventories be
measured at the lower of cost and net realizable value, and provides more
guidance on the determination of cost and its subsequent recognition as an
expense, including any write-down to net realizable value. The company is
assessing the effect of the new standard but does not anticipate any material
effect on its results.
Financial Instruments - Disclosures, and Financial Instruments -
Presentation: These new standards replace accounting standard 3861 Financial
Instruments - Disclosure and Presentation. Presentation requirements have not
changed. Enhanced disclosure is required to assist users of the financial
statements in evaluating the significance of financial instruments on the
company's financial position and performance, including qualitative and
quantitative information about the company's exposure to risks arising from
financial instruments. The new accounting standards cover disclosure only and
will have no effect on the financial results of the company.
4. Acquisition
On January 16, 2007 Emera acquired a 19% interest in St. Lucia Electricity
Services Limited ("Lucelec") for a purchase price of $25.7 million. Lucelec is
a vertically integrated electric utility with an exclusive license to
generate, transmit and distribute electricity on the island of St. Lucia to
2045. The utility has 66 MW of generating capacity and 800 kilometers of
electricity transmission and distribution assets. Lucelec is a cost of service
utility, with a minimum rate of return of 10% on a 50% equity basis.
The acquisition has been accounted for as an equity investment, and
accordingly, the investment was initially recorded at cost. Emera's pro-rata
share of the results since acquisition have been included in the investment
and consolidated statements of earnings. Any dividends received or receivable
reduces the investment. Lucelec is included in the segment "Other" in Note 5
Segment Information.
5. Segment Information
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nova Scotia Bangor
millions of dollars Power Hydro Other(x) Total
-------------------------------------------------------------------------
Three months ended June 30, 2007:
Revenues from external customers $271.1 $ 31.5 $ 20.7 $323.3
Net inter-segment revenues/
(expenses) 22.5 (0.7) (21.8) -
Net earnings applicable to
common shares 23.9 4.8 5.4 34.1
Six months ended June 30, 2007:
Revenues from external customers 574.5 67.6 41.1 683.2
Net inter-segment revenues/
(expenses) 57.3 (1.0) (56.3) -
Net earnings applicable to
common shares 50.0 11.7 12.1 73.8
As at June 30, 2007
Total assets 3,264.1 613.5 350.0 4,227.6
-------------------------------------------------------------------------
Three months ended June 30,
2006:
Revenues from external customers $231.5 $ 31.9 $ 12.5 $275.9
Net inter-segment revenues/
(expenses) 38.9 (0.9) (38.0) -
Net earnings applicable to
common shares 24.3 2.7 2.2 29.2
Six months ended June 30,
2006:
Revenues from external customers 494.5 66.9 25.2 586.6
Net inter-segment revenues/
(expenses) 89.1 (1.4) (87.7) -
Net earnings applicable to
common shares 61.7 6.4 4.7 72.8
As at June 30, 2006
Total assets 3,099.0 565.0 337.4 4,001.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(x) Other consists of corporate activities and adjustments to reconcile
to consolidated balances.
6. Fuel for Generation and Purchased Power
Accounting for the impact of rate regulation:
In February 2007, the UARB approved an average increase in electricity
rates for NSPI of 3.8% effective April 1, 2007. The rate increase was part of
a settlement agreement between NSPI and key stakeholders. A provision of the
settlement agreement allows NSPI to defer, for future recovery in rates, up to
$8 million of fuel costs should natural gas margins be less than $47 million.
As of June 30, 2007, NSPI has deferred $3.0 million. In the absence of the
UARB's approval, these costs would have been expensed as incurred and Q2 and
year-to-date 2007 earnings would be $3.0 million lower.
7. Employee Future Benefits
Emera maintains contributory defined-benefit and defined-contribution
pension plans, which cover substantially all of its employees, and plans that
provide non-pension benefits for its retirees. The Company's estimated total
benefit cost, related to these plans, for the three month period ended
June 30, 2007 is $10.3 million (2006 - $10.7 million), and for the six month
period ended June 30, 2007 is $21.0 million (2006 - $21.5 million).
8. Interest
Interest expense consists of the following:
Three months ended Six months ended
June 30 June 30
-------------------------------------------------------------------------
million of dollars 2007 2006 2007 2006
-------------------------------------------------------------------------
Interest on long-term debt $ 26.2 $ 25.9 $ 51.9 $ 53.2
Interest on short-term debt 6.1 1.5 11.0 5.5
Amortization of debt financing 0.4 0.5 0.9 1.0
Foreign exchange (gains) losses (1.1) 1.5 (2.0) 1.0
-------------------------------------------------------------------------
$ 31.6 $ 29.4 $ 61.8 $ 60.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Long-Term Debt
As of June 30, 2007, long-term debt includes $2.2 million (December 31,
2006 - $3.8 million) in capital lease obligations.
10. Common Shares
As of June 30, 2007 there were 111.24 million (December 31, 2006 -
110.93 million) issued and outstanding common shares, 4.83 million
(December 31, 2006 - 4.90 million) common shares reserved and available for
issuance under the senior management stock option plan, and 1.07 million
(December 31, 2006 - 1.15 million) common shares reserved and available for
issuance under the employee common share purchase plan.
During the six months ended June 30, 2007, the Company issued 0.3 million
(2006 - 0.3 million) common shares. Common shares were issued through the
employee common share purchase plan, the senior management stock option plan,
and the dividend reinvestment plan.
11. Comparative Information
Certain of the comparative figures have been reclassified to conform to
the consolidated financial statement presentation adopted for 2007.