Unitil Corp (UTL) 2010 Q1 法說會逐字稿

Good day ladies and gentlemen welcome to the first quarter, 2010 Unitil earnings conference call. My name is Francine and I am your operator for today.

(Operator Instructions)

We will like to turn your presentation over to your host for today's call, Mr. David Chong, Director of Finance. Please proceed, sir.

Good afternoon thank you for joining us to discuss Unitil's first quarter 2010 financial results. I'm David Chong, Unitil's Director of Finance. Speaking today will be Bob Schoenberger, Unitil's Chairman, President, and Chief Executive Officer and Mark Collin, Unitil's Senior Vice President, Chief Financial Officer, and Treasurer. Also joining us today is Larry Brock, Unitil's Chief Accounting Officer and Controller.

Our remarks during this conference call will contain forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Reform Act of 1995. These forward-looking statements include statements regarding the Company's financial commission, results of operations, capital expenditures, and other expenses, regulatory environment and strategy, market opportunities, and other plans and objectives.

In some cases, forward-looking statements can be identified by terminology such as may, will, should, expects, or believes, the negatives of such terms, or other comparable terminology. These forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties and the accounting's actual results may differ materially. Those risks and uncertainties include those detailed in the Company's filings with the Securities and Exchange Commission, including those appearing in the Company's Form 10-K for the year ending December 31, 2009.

Forward-looking statements speak only as of date they are made. The Company undertakes no obligation to update any forward-looking statements. With that said I will now turn the call over to Bob.

Thank you. I also like to thank everyone for joining us today. As you may be aware, this is Unitil's first public conference call since it was incorporated in 1984. This is part of a new chapter for us at Unitil.

Within the last 18 months, we completed, financed, and integrated the northern acquisition, which nearly doubled Unitil's market capitalization and operations. As a larger company, we have generated increasing investor interest and we look forward to enhancing our communications with our investors and analysts to future public earnings calls.

Let me begin by saying that we're gratified with our performance and emergency response to the hurricane force wind storm that struck our service territory this past February. Throughout all of last year, we dealt with a number of legacy issues from the devastating ice storm of December 2008. One of the major commitments we made as part of our self-assessment of the ice storm response was to enhance our emergency preparedness and customer service procedures.

We adopted the national internet management system, which is used by both federal and state governments, and is a standard model for emergency response. We also made other sweeping changes throughout the organization including technological investments and an outage management system, hiring of additional personnel, and training for every one of our employees to respond to a full scale emergency. Simply put, in the course of just a year, we completely transformed our emergency preparedness and communications procedures.

Almost unimaginably, our new emergency procedures were tested to the fullest extent just over a year after the December 2008 ice storm. On February 25, 2010, a New Hampshire electric service territory experienced a devastating wind storm with hurricane force winds exceeding 90 miles per hour. This wind storm was second worse natural disaster in the state's history. 63,000 or 85% of our New Hampshire electric customers lost power as a result of the storm.

We responded to this storm with advanced preparation including the procurement of crews one day before the storm. Ultimately we engaged over 250 crews from eight states and Canada to help restore power. We had over 1,000 personnel, including all of our Unitil employees working during the event to restore power. A customer service center responded to 85% of our customer's calls in under 20 seconds.

In the end, we restored power to all of our customers in a record breaking 3.5 days. Our response was very favorably received by the New Hampshire community. We've received letters of thank you from the governor, local fire and police departments, the media, and most importantly, our customers.

Now let me change gears and discuss the economy and the impact to the Company. The lingering effect of the recession continues to impact our financial results, which mark will discuss further. However, we are beginning to see signs of improvement in the local economy. As of March 2010, the unemployment rates in our service territories were 7% in New Hampshire, 8.2% in Maine, and 9.3% in Massachusetts, which are all below the US average of 9.7%.

Additionally, the unemployment rates in all three states have held relatively steady since the end of 2009. We are hopeful that this is a sign that an economic recovery is now underway. But in any event, we expect an economic recovery would have relatively little uplift to our unit sales in 2010. Rather, we would expect an economic recovery to have a much more meaningful impact to our unit sales in 2011. To help combat the continuing effects of the recession, we have implemented several operating expense savings for 2010 including salary freezes, reduced benefits, and a halt to promotions.

Now let me talk a little bit about our key strategies for the near term. Our primary goal for 2010 and 2011 is to position the Company to realize the full earnings power of its assets over the next 12 to 18 months. We have a broad regulatory agenda in 2010 and 2011 with base rate cases in every one of our utility subsidiaries. This is a total of five rate cases. And for those of you familiar with the utility rate regulation, as I know you are, you can appreciate the commitment and effort the Company is placing on this initiative.

Sales are down across our utilities because of energy efficiency, customer response to energy price signals, and the downturn on the national economy. These rate cases should allow us to reset our distribution rates to align our revenues and costs and should enable us to close the gap between our actual rate of return and the more compensatory rate of return. In New Hampshire, we recently filed a rate case for our Unitil energy system subsidiary and will follow this year with rate case activity in Massachusetts and at the FERC for our Granite State pipeline. Mark will go over more specifics on this rate case agenda momentarily.

Another important item on our regulatory agenda is our program to replace all the cast iron gas facilities in the Portland, Maine area under a multiyear system modernization plan for our Northern Utility subsidiary. We were estimating an approximate $70 million comprehensive long term replacement program in the area, which will provide significant rate base growth opportunities in addition to significant organic growth potential in terms of customer additions over a number of years. We are currently finalizing the duration and cost recovery of the program with our regulators in Maine.

A timing of the Northern Utilities acquisition could not have been better. The economic, political, and environmental fundamentals of natural gas are extremely favorable in today's market, which will provide us further gas distribution expansion opportunities across all of our service territories including Maine, New Hampshire, and Massachusetts. In particular, the abundant supply of natural gas has caused the natural gas price to fall significantly and we estimate that natural gas now has a competitive price advantage of about 25% to 30% compared to fuel oil.

On the final topic, I would like to spend a minute discussing the results of a nonregulated energy brokering company, Usource, which currently operates in 14 states. Usource is an energy brokering company, a relatively low risk business that does not tie up our capital resources. Usource is not counter party to energy contracts. It only acts as an agent. In 2009, Usource achieved sales margins of $4.3 million and net income of $1.6 million or $0.16 per share. We plan to expand Usource's presence into four additional states in 2010. I will turn the call over to Mark to discuss our financial results for the quarter.

Thanks, Bob. I would like to thank everyone for joining us today on Unitil's first public conference call. I look forward to expanding our investor and analyst communications in the future through quarterly conference calls. Earnings in the first quarter of 2010 were affected by lower sales due to the unusually warm winter temperatures and higher year over year operating expenses.

This morning Unitil's reported net income to common of $6.5 million or $0.61 per share for the first quarter of 2010 compared to $9.1 million or $1.14 per share in the first quarter of 2009. Earning per share in the first quarter of 2009 are not directly comparable to the first quarter 2010 because Unitil issued common shares during the first half of 2009. Our unit gas sales for the first quarter 2010 were down 6.5% or $1.4 million on a margin basis compared to the same period in 2009.

Residential was down 7.8% and commercial industrial sales or C&I was down 6%. We attribute most of the decline to milder winter weather this year compared to last. The heating degree days in our gas service territories in the first quarter of 2010 were 7.6% fewer compared to the same period in 2009.

On a weather normalized basis, total unit gas sales were down about 3% in the first quarter of 2010 compared to last year, primarily reflecting reduced C&I usage. On the electric side, our unit electric sales for the first quarter of 2010 were down 1.8% or $0.3 million on a margin basis compared to the same period in 2009, driven primarily by a combination of milder weather and continued conservation efforts on the part of our customers.

On a weather normalized basis electric sales were about flat with last year, providing some indication that we may have seen the bottoming of the recent recessionary trend in our sales. O&M expenses increased $1.8 million in the first quarter of 2010 compared to the same period in 2009. The increase in O&M primarily reflects higher utility operating costs associated with the completion of the transition and the full integration of northern utilities in Granite State operations into consolidated operating results in the current period.

Overall, the acquisition has been extremely successful on a number of fronts we've discussed before. From a synergies perspective, the acquisition has created cost savings of approximately $5 million to $6 million for the consolidated Company. Looking forward to the remainder of 2010, we have plans to aggressively manage our O&M expenses, as Bob has mentioned earlier.

So, if we take a step back and look at our earnings in the first quarter 2010 compared to 2009, we immediately see that the year-over-year difference is primarily attributed to reduced gas and electrical margin totaling $1.7 million and the higher O&M expenses of $1.8 million. As I mentioned earlier, we've begun to see electric sales stabilizing on a weather-normalized basis and we expect the trend to continue as the economy recovers. From an O&M perspective, we do not expect much cyclicality in our total level of O&M expenditures over the coming quarters. In addition, we expect our O&M expenditures to be reflected in our cost to service in our upcoming rate case filings, which I will discuss in more detail momentarily.

I would like to spend a minute on our expected capital expenditures for the next two years. We expect our capital expenditures on property plant and equipment to total about $64 million in 2010 and approximately $60 million in 2011. As Bob mentioned, we were also finalizing our plans for a long term cast iron replacement program in the Portland area of our main gas service territory. We expect this project to provide strong organic and rate base growth opportunities over the coming years. Historical growth in that plant has averaged around 6% to 8%, and we believe that we can continue to have attractive rate base growth opportunities over time to support increased earnings as we reset our rates to bring our revenues and expenses in line across our service territories.

Bob briefly mentioned our rate case initiatives for 2010 and 2011. I would like to spend a minute to elaborate on our rate case filings, which will help us to achieve the full earnings power of the Company. On April 15 of this year, we filed an 8-K which included a presentation of highlighting our anticipated rate case schedule and subsidiary level financial information.

In the discussion below, I will summarize the timing and actual return on equities disclosed in that presentation. We filed a rate case earlier this month for Unitil Energy Systems, our elected distribution subsidiary in New Hampshire. Unitil Energy's actual return on equity for 2009 was 5.2%. Also in the second quarter this year, we plan to file a rate case for Granite State at the Federal Energy Regulatory Commission. Granite State's actual return on equity for 2009 was 6.5%.

We are currently in discussions with our regulators in Massachusetts regarding electric and gas rate case filings for our Massachusetts distribution utility Fitchburg Gas and Electric Light Company and we expect to file these rate cases in 2010 as well. Fitchburg Gas and Electric Light Company's consolidate return on equity for 2009 was 3.6%.

In 2011, we plan to file our first rate case for the main division of northern utilities. We are currently assessing if we will also file a rate case for the New Hampshire division of northern utilities in 2011. We hope to have further clarity on this by the end of the year.

Northern Utilities consolidated actual return equity for 2009 was 7.7%. For comparison purposes in Massachusetts, the most recent return on equity authorized by the department for the state's largest electric utility was 10.35%.

And for a gas utility it was 9.95%. In New Hampshire, the commission's most recent decision authorized a 9.54% return on equity for the state's other gas utility. Now I like to go over a few key items of the Unitil Energy Systems's rate case filings. On April 15, we filed base rate case with the New Hampshire public utilities commission to implement a permanent rate increase of $10.1 million which represented increase of 6.5% over present rates. This rate increase was based on a rate base of $130.4 million as of year end 2009. Unitil Energy's common equity ratio as of year end 2009 was 44.2% and requested ROE was 10.7%.

We expect the regulatory process to be approximately one year before the permanent rates will be effective, so in the interim, Unitil Energy requested temporary rates to be effective July 1, 2010. In New Hampshire, permanent rates can be applied retroactively to the date temporary rates are effective, or assuming our temporary rates are approved, that will be July 1, 2010.

Other salient features of the rate case filing include storm recovery for the December 2008 ice storm as well as the 2010 wind storm that Bob discussed. And the creation of a storm reserve fund to help mitigate the impact of future storms. Unitil Energy requested three future step adjustments to mitigate earnings attrition in the future. The first step adjustment would begin to take place in 2011 and then additional steps will be implemented each year thereafter for the next several years. Overall, one of the purposes of these multiyear step adjustments is to put in place a longer term rate plan that will allow the Company reasonable opportunity to earn its authorized rate of return and continue to meet its obligations to customers over a period of years without requiring frequent and costly rate cases.

One last topic. I would like to spend a minute on our recent financing activity. In the first quarter of 2010, we closed two long term debt financings totaling $40 million at two of our utility subsidiaries. The interest rate environment remains extremely favorable and we were particularly pleased with the pricing of both these transactions, which were both ten year securities and were priced in the low 5% coupon range. At this point, we do not have plans for additional financings, either equity or debt, for the foreseeable future. This concludes our summary of our financial performance for the period. Now I will turn the call over to the operator, who will coordinate questions from the audience.

(Operator Instructions)

Our first question comes from the line of Dan Fidell from Brean Murray and Carret.

Good afternoon, thanks for the call.

How are you?

Very well, thanks. Just a couple of housekeeping questions. First off, on the capital spending budget $64 million for 2010, $60 million for 2011. Can you talk about how that is going to be split a little bit between the electric and gas divisions?

Yes, it's about out of the $60 million, a good way of looking at it's about -- it's almost evenly split fifty-fifty between the two divisions.

Okay. And then in terms of quantifying the earnings impact from warm weather on Q1, is that something you can do separate from the conservation effect for Q1?

Not really. We don't have that kind of granularity in terms of the conservation effect. One of the things we're seeing is that in the past, a lot of the conservation was due to our own programs and own initiatives. But we're really seeing a call from customers now that are starting to invest themselves without additional utility programs in conservation efforts and all. So, we've kind of baselined that in our sales figures and now look at just the weather normalization on top of that.

Okay. Then can you just sort of talk a little bit about whether or not in the UES rate filing if that included request for decoupling? I'm assuming that will be included in the Massachusetts filings as well. Just any kind of clarity you can give us in terms where you stand on formal decoupling?

Yes, unlike in Massachusetts where decoupling is essentially mandated both by statute and regulatory policy, in New Hampshire they have invited utilities to explore decoupling as a potential mechanism but have not mandated it. We spent considerable time speaking with the staff and following New Hampshire and really ended up determining that decoupling proposal was probably not the best fit for UES in this rate case going forward. We are going to let those policies continue to develop and mature a little more before we continue to explore that in New Hampshire. So, instead of that, what I described in New Hampshire is, we have proposed a series of step adjustments, which are more common to the rate-making paradigm in New Hampshire, and which do provide some additional revenue stability and a potential to offset earnings attrition or decreases that you may see from sales declines through a periodic regular step adjustments and we think through that rate-making mechanism, we'll be able to achieve a better result for our New Hampshire affiliate and a better regulatory -- overall regulatory response to our filing.

Can you give a little color on the step adjustments? Is it pegged to inflation or some other metric?

Really, primarily rate base driven step adjustments, the two most significant ones that will come earliest is, the first step adjustment we proposed is to essentially update the test year, which is a 2009 test year, to update that at the time permanent rates go into place to be able to take into account the investment in the -- during 2010. So they will be immediate step adjustment on the date of permanent rates reflecting the investment we make in current making now in 2010. So there will be immediate step adjustment on the date of permanent rates reflecting the investment we make -- that we're currently making now in 2010. And then, a little further out in 2011, 2012, we have a couple of planned projects here on the seacoast with our electric division associated with some substation work that we're going to be doing. And those are fairly large capital projects. And what we've proposed to do is to have those larger capital projects come in, again, when completed, they come into rate base and will receive full return through that rate making process. Those are the two major rate base driven ones. Then a third step adjustment proposal is we've piggy-backed on some rate-making that has been done already in New Hampshire for the state's largest utility. And that basically is a program designed to increase reliability -- spending on reliability-type improvements, which are often non-revenue producing type improvements to the system, as well as vegetation management type expenditures. And we proposed that we will make incremental expenditures on the system related to reliability as well as increase our vegetation management across the system, but provide for essentially flow-through, or dollar for dollar recovery of that. So that we are not essentially having attrition of earnings problems with that. And that has received some favorable rate-making in the past and precedent here in New Hampshire. So, we're pretty optimistic that we'll be able get a good program in place for that.

Thank you. That's very helpful and very good color on that. Last question and I'll let someone else ask a question. Just quick housekeeping, on interest expense net, 4.3% versus 4.8% for the quarter? Can you separate interest expense from interest income out of those numbers?

We do. It's actually separating out in our Q, Dan. Rather than take up the time here, it's a separated item out in our 10Q report.

Okay, I didn't see it in there, but I'll go and take a look again. Thanks very much.

Yes, Dan, this is Bob. I just want to follow up on Massachusetts.

Sure.

In Massachusetts, as you know, the regulatory officials have already given revenue to coupling mechanisms to several utilities including National Grid and Bay State Gas. So, we're a finalist for both gas and electric, we will follow those mechanisms that have already been approved.

Great, thank you very much.

Our next question comes from the line of Ella Vuernick from RBC Capital Markets.

Good afternoon. My first question is a follow-up, actually, of the prior gentleman's question. Are you able to provide the impact to EPS from, within weather, what portion of that came from the February wind storm? And also, any color you can give us about what you are seeing in terms of energy conservation versus energy efficiency.

Well, I guess on the first issue, the February wind storm is, our restoration effort, as Bob indicated, was really something to behold, to watch. But it was 3.5 -- we had everybody restored in about 3.5 days. So, the material, and that's a staggered restoration of customers, so you have some back earlier. So, there's not a material impact from lost sales in the quarter from the wind storm at all. You know, the question regarding energy efficiency, conservation and all of that, it's a moving target right now. There's clearly been a change in consumer behavior that we've seen across the spectrum, whether it be seeing eye customers or residential customers. Both as I was stating earlier it appears that we used to be able to get a harder measure of it by looking at our own programs and own installations of efficient lighting or efficient equipment and being able to measure what we installed relative to energy efficiency. But there is now clearly a greater overall conservation consciousness and effort that we're seeing by customers that have begun to look for ways to save on energy cost, again, across the spectrum with their own investments and their own desire to be more green, so to speak. So, we're starting to see more of that and it's difficult to pick that apart separate in our sales figures other than we do know that looking at our sales that there has been a dampening of average usage per customer relative to prior years even after we weather normalize but we do see that declining average usage per customer. Somewhat making that issue more complicated is that we have gone through a period, although subsided quite a bit, a fairly significant rising energy prices as you'll remember when prices spiked. And that elasticity effect also clearly had an impact on our customers and in some ways was born out through the recessionary period. All those factors, you know we have -- we don't have a great deal of ability to kind of zone in on that as a target item, but we do provide in here, as I indicated, whether normalized data and on the gas side in particular, the change from weather year to year is almost one for one with the change in sales. So, there's a very strong relationship during the winter period on our gas sales relative to the weather. On the electric side, we pretty much have seen a bottoming out it appears on weather normalized sales and we think that with normal weather, particularly last -- as you take last summer for example, we had a very cool summer last summer. So, with normal weather, we would hope to see maybe a little uptick in our sales if we get a little more normal weather.

Okay. Also, I wanted to clarify a point about O&M. O&M was up this quarter over the prior year, but you've also mentioned cost management efforts. Is this quarter's O&M figure a reasonable run rate for the year or how should we think about that?

Yes, I think that's right. I think it's a reasonable run rate for the year. I think it incorporates cost savings that Bob already talked about. We did not do the salary increase at the beginning of the year, here and have held position freezes, et cetera.

Okay. And then one last question if I may. The Fitchburg rate case. If you were to file as planned this year, when do you anticipate the impact in 2011?

Early. We would hope to get that case in so that it has an earlier impact in the fully recognized sometime within that first quarter of 2011.

Okay. Very good. Thank you.

(Operator Instructions)

Our next question comes from the line of James Heckler from Levin Capital Strategies

Hello, good afternoon.

Hello, James.

Hello, James.

I appreciate all of the detail you provided around the ROEs for 2009. I was wondering if you had a break down of the ROEs, or perhaps even on a consolidated basis for the trailing 12 months, which would exclude the first quarter of 2009 but include the first quarter of 2010.

We don't have them available for disclosure at this point.

Okay. Would it be safe to say those always are probably even a little bit lower, just given sales and the cost pressures that you saw in the first quarter of 2010 versus first quarter of 2009?

I think that's reasonable.

Okay . And on the O&M side, does that O&M, that was reported this quarter, that increase, I understand we can use that going forward number, did that include costs for the storm

No.

It did not.

No.

That's all I have. Thank you very much.

Our next question comes from the line of Shelby Tucker from Oppenheimer & Company.

Good afternoon. Just a quick clarification on James' question the last one he had. I thought I heard in Bob's comments that the O&M did include the cost to achieve the synergies, or at least part of that, and the integration itself. Is that correct or did I mishear?

So, the O&M in 2010, most of the costs to achieve the synergies was incurred throughout 2009. We're not incurring additional transitioned costs. We've pretty much completed that transition and integration work. But it does include, Shelby, as you may recall, that it's part of our rate plans in both New Hampshire and Maine. And we were allowed to essentially capitalize or defer a portion of our transition and transaction costs and amortize those over ten years. So, it does include the period amortization of those costs.

Okay. And then the other question I have, which is probably more of a housekeeping matter, if I look at your first quarter 2009 filing, you restated your cash flows from operations from about $5 million to about $32 million. Obviously you seem to have shifted your gas inventory financing to financing activity. Is that more correct? And number two is that what we should see going forward and, therefore, does that enhance the cash flow from operations for the first quarter, typically?

Yes. Number one, that is correct. And I think this is a good comparison of our current cash flow from operations, yes.

Okay. Thank you.

And we have a follow-up question from the line of Dan Fidell from Brean Murray and Carret.

Thank you. Just a follow-up question. I know that you all don't officially offer earnings guidance for the coming year. But, just wanted to make sure directionally we had things right with the missed roughly $0.50 or so off the consensus that was out there, but talking about O&M, really tightening the belt as it were for the next few quarters and putting in interim rates with UES, should we assume a number not quite that dramatic of a fall off for earnings as we go forward here for 2010?

I tried to gauge what you are talking relative to, Dan. When you say not as dramatic a falloff compared to what?

Well, assuming that we can keep everything consistent for Q2, three and four, and we've got the miss off Q1, fairly dramatic like I said, roughly $0.50 off the consensus that was out there. Just wondering if you can give us any color in terms of whether or not you expect that we shouldn't just simply apply that to our forward estimates, that you see good cost savings for O&M, or like I said the interim rates going into effect, that it wouldn't necessarily be that dramatic a pull back for 2010 earnings?

I guess the two sides of the equation that we've talked about is, one, on the revenue side, what we will have coming in for our temporary rates here in July in some uplift in revenue relative to our UES rate case for projection purposes, we will, again, from a sales perspective, we are still trying to work our way out of this recessionary environment and we're really looking forward to 2011 before we get much more on that. But we do have a little bump for the UES rate case coming in and then the Granite rate case will actually come in more in the -- toward the tail end of the year, probably November or so. On the O&M side, as we talked earlier, is that the run rate is pretty close to what you saw in the first quarter. So, from your modeling perspective, that run rate is what we would probably expect it to see in the next three quarters as we don't have a lot of cyclicality in that number.

Thank you. And then maybe just the last question in terms of as you go forward with your focus on these regulatory proceedings, does that necessarily preclude looking around for additional acquisitions to continue to grow the Company? Is that something that's still on your radar?

No, this is Bob. Dan, I don't believe it does. Again, our premise has always been, at least on the last couple of years, that some the bigger companies in the region might begin to start rationalizing some of their holdings in the region. We still believe that's a good assumption. So we don't expect that, while it's a -- I will admit it's a pretty Fulsom regulatory agenda. We don't believe that that would prevent us from going after an opportunity should it present itself.

Thank you very much.

Ladies and gentlemen, that concludes the Q&A portion of the presentation. I would now like to turn the call over to Mr. David Chong.

Well, if there are no further questions, we thank you very much for your interest in today's call and please don't hesitate to call me with any questions that come to mind after this call. We certainly look forward to visiting with you again after second quarter 2010. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.