Unitil Corp (UTL) 2010 Q2 法說會逐字稿

Good day and welcome to the second quarter 2010 Unitil earnings conference call. At this time all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of the conference. (Operator Instructions) I will now turn the call over to your host for today, Mr David Chong, Director of Finance. Please proceed, sir.

Good afternoon and thank you for joining us to discuss Unitil's second quarter 2010 financial results. With me today are Bob Schoenberger, Chairman, President and Chief Executive Officer, Mark Collin, Senior Vice President, Chief Financial Officer and Treasurer, and Larry Brock, Chief Accounting Officer and Controller. We will discuss financial and other information about our second quarter on this call. As we mentioned in the press release announcement call, we have posted that information, including a presentation, to the investor's section of our website at www.unitil.com, we'll refer to that information during this call.

Before we start please note that comments made on this conference call may contain statements that are commonly referred to as forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking include statements regarding the Company's financial condition, 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 negative of such terms or other comparable terminology. These forward-looking statements are neither promises, nor guarantees, but involve risks and uncertainties and the Company's actual results could differ materially. Those risks and uncertainties include those listed or referred to on slide one of the presentation. The forward looking statements speak only as of the 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.

Thanks, David. I would also like to thank each of you for joining us today. I would like to begin by discussing the highlights of the past quarter. If you could turn to slide two of the presentation, in the second quarter of 2010, we reported a net loss of $0.19 per share compared to net income of $0.03 per share in the second quarter of 2009. Mark will go over our financial results in detail shortly.

Let me highlight the major drivers. Our earnings in the quarter were impacted by lower gas sale margins and higher fixed costs, resulting from our ongoing capital improvement to our distribution systems. In addition, I would like to remind everyone of the seasonal nature of our natural gas operations, which will cause lower earnings in the second and third quarters because of reduced natural gas usage in the summer months. We believe our financial results in the second quarter of 2010 are not reflective of Unitil's financial potential, and we have outlined a systematic and strategic path to achieve the full earnings potential of the Company.

On slide three, I outlined our key strategies for 2010 and 2011. Our regulatory strategy includes base rate case filings in all of our utility operating jurisdictions over the next 12 months. During this process, we will be able to reset our base distribution rates, which should allow our distribution utilities to recover their cost of service and earn a compensatory return.

Turning to slide four, we filed our first base rate case filing for our New Hampshire electric distribution utility on April 15, of this year; which included a petition for a temporary rate increase. On June 29, the New Hampshire PUC approved a temporary rate increase of $5.2 million on an annual basis effective July 1, of this year. The temporary rate increase also includes a provision, which allows us to begin recovery of deferred storm costs we incurred during the December, 2008 ice storm. Overall, we are pleased with this outcome, as it will help us to improve our financial results, while at the same time, ensure that our customers will benefit from the support this will provide for continued investments in our electric distribution system. The current procedural schedule provides for a decision on our permanent rate request of $10.1 million by February, 2011. In New Hampshire, permanent rates can be reconciled back to the effective date of the temporary rate increase, or back to July 1. Now let me discuss another important development in respect to our rate case activity on slide five.

On June 29, 2010, our natural gas pipeline subsidiary, Granite State Gas Transmission filed a base rate case requesting an approximate $3 million increase to its revenues. This is Granite's first filing for a rate change since 1997. This rate case was filed with the Federal Regulatory Energy Commission and we expect the regulatory process to take approximately six months with a rate decision by the end of the year. At our Massachusetts combined gas and electric distribution utility in Fitchburg, we're currently preparing rate cases for both our gas and electric operations. As many of you may know, in Massachusetts, all utilities are required to file rate decoupling proposals in conjunction with comprehensive and aggressive plans to promote and support customer energy conservation and efficiency as part of their next rate case. We will file a full decoupling plan for Fitchburg before the end of the year.

Another material development on the regulatory front pertains to our accelerated cast-iron replacement program in Maine on slide six. This program involves a comprehensive upgrade and replacement program which will provide for the systematic replacement of cast-iron and bare steel pipe in our natural gas distribution system in Portland and Westbrook, Maine, and the conversion of the system to intermediate pressure. On July 7, 2010, at its oral deliberations, the main PUC approved an accelerated cast-iron replacement program with the objective of completing the program by 2024. During the proceedings, we were able to work closely with the main commission staff, the office of the public advocate and state representatives to negotiate and structure a program that properly balances public safety, cost recovery, and rate per impact. Upon completion, this project will result in a state-of-the-art gas distribution infrastructure, and will significantly increase capacity to Portland, the largest city in Maine. We expect to increase our market penetration rate of natural gas versus oil as a result of this project. Particularly given current natural gas price competitiveness.

Let me change gears a little bit and discuss the economy and the impact on the Company. We are beginning to see signs of improvement in the local economy. On a weather normalized basis, we estimate that both our electric and natural gas sales in the second quarter were up approximately 4% over the prior year. Additionally, we have seen the unemployment rates in all of our service territories steadily decline since the end of 2009. As of June, 2010, the unemployment rates in our service territories were 5.9% in New Hampshire, 8% in Maine, and 9% in Massachusetts. However, as a lot of people, we continue to see conflicting economic indicators. So we remain cautious, but hopeful that we'll continue to see improvements in the regions economy over the balance of year. Now I will turn the call over to Mark to discuss our financial results for the quarter. Mark.

Thanks, Bob. I would also like to thank everyone for joining us today. This morning we announced a net loss of $2.1 million, or $0.19 per share, for the second quarter of 2010. Compared to net income of $0.2 million, or $0.03 per share, for the second quarter of 2009. For the six months ended June 30, 2010, we reported net income of $4.4 million, or $0.41 per share, compared to $9.3 million, or $1.10 per share for the same period 2009. I would like to point out that the earnings per share in 2010 compared to 2009 are not directly comparable, because the Company issued shares during the first half of 2009 to finance its acquisition of Northern Utilities and Granite. The average shares outstanding for the current and prior periods are shown on slide two of the presentation.

In addition, as Bob indicated earlier, the Company's financial results are seasonal in nature, which is apparent here in the second quarter, and will be again in the third quarter, when gas sales are substantially lower. As I will explain shortly, our financial performance largely reflects lower gas sales margins due to weather and other factors, and increases in fixed costs year-over-year. As Bob outlined, we expect that in the coming year we'll be able to complete several base distribution rate cases, which will allow us to recover our costs to serve and fully realize the earnings power of our utility assets. Now let me turn to our gas unit sales on slide seven.

Warmer than normal weather had a significant impact on our natural gas sales in the first half of 2010. Total unit sales of natural gas decreased 5.1% and 6% in the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. Compared to normal weather, there were 26% and 10% fewer heating degree days in the three and six months ended June 30, 2010, respectively. To put things in perspective, while the first half of 2009 was fairly normal, 2010 has been much milder. We estimate that earnings were negatively impacted by $0.05 and $0.12 in the three and six months ended June 30, 2010, respectively, compared to normal weather in the same periods.

Turning to slide eight, total kilowatt hour sales increased 5.3% and 1.5% in the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009, driven primarily by increased sales to all customer classes. We estimate that weather impacted electric earnings, which are far less sensitive to weather than gas earnings, less than $0.01 in the first half of the 2010. As Bob mentioned earlier, we may have seen some improvements in our electric and gas sales. In the second quarter on a weather normalized basis we saw an approximately 4% increase in total unit sales for both our electric and gas utility operations. We are encouraged that we're beginning to see some indications that our sales are beginning to turn along with the economy.

Let's turn to slide nine and let me spend a minute reviewing our sales margins, operation and maintenance expenses and our fixed costs, including depreciation and amortization, property taxes and interest expense. Natural gas sales margin decreased $2.4 million and $3.8 million in the three and six months end June 30, 2010, respectively, compared to the same periods in 2009. The decrease in the three-month period principally reflects lower sales of natural gas, primarily due to the effect of warmer temperatures of approximately $0.5 million. Lower estimated unbilled revenue in the current period of $1.1 million and the recognition of commodity-related bad debt expense of $0.8 million, which had previously been classified in home and expense in the first quarter. This accounting reclassification for commodity-related bad debt was done to conform Northern's bad debt accounting to our other utility subsidiaries and has no effect on earnings, but obviously does change the accounting geography associated with this expense. The decrease in the six-month period principally reflects lower sales of natural gas, which reflects the effect of milder winter heating season of approximately $2.1 million and lower estimated unbilled revenue in the current period of $1.7 million. Look at electric sales, electric sales margin increased $0.4 million and $0.1 million in the three and six months ended June 30, 2010, compared to the same period in 2009, reflecting higher electric kilowatt sales to all of our customer classes. Now let's turn to expenses.

Operations and maintenance were approximately $12 million for both the first and second quarters of 2010. As I indicated in our first quarter conference call, our O&M expenses in 2010 now reflect the transition and full integration of Northern Utilities and Granite into our operations. We expect that our recent O&M results in the first and second quarters of 2010 are indicative of the run rate for the remainder of 2010. Depreciation and amortization is up $0.7 million and $1.5 million in the second quarter and first quarter of 2010 respectively, compared to the same periods in 2009. This increased depreciation and amortization expense results from normal ongoing capital expenditures and additions to our utility rate base. Similarly, local property and other taxes increased $0.3 million and $0.4 million in the second quarter and first half of 2010, respectively, compared to the same period in 2009. Much of this increased expense reflects higher local property tax because of higher levels of utility plant and service.

Net interest expense increased $0.8 million and $0.3 million in the second quarter and first half of 2010 respectively, compared to the same periods in 2009. In March, 2010, Unitil Energy and Northern Utilities collectively issued $40 million of long-term debt, which is partially contributing to the higher interest expense in the first half of 2010. Furthermore, net interest expense in 2010 reflects the permanent financing of Northern Utilities and Granite, which was completed in the second quarter of 2009. We expect that our recent net interest expense in the second quarter of 2009 is indicative of the run rate for the remainder of 2010. Now let me change gears and follow-up to Bob's earlier discussion on our rate case activity.

Our distribution utilities have been impacted by the economic recession, lower unit sales and higher fixed costs. On slide 10, we have provided an update to our utility operating results. In the 12-month period ending June 30, 2010, Unitil Energy's return on equity was 4%, Fitchburg Gas and Electric's return on equity was 6%, Northern Utilities return on equity was 0.7% and Granite's return on equity was 4.5%. 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 in the state 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. As Bob mentioned, our regulatory agenda is extremely important to bring our distribution revenues back in line with our cost to serve and support our operating cost and capital expenditure program. We look forward to updating you as new developments arise on this front. Now this concludes our summary of our financial performance for the period. 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 Lasan Johong with RBC Capital Markets. Please proceed.

Thank you, good afternoon all.

Hello Lasan.

Just a few questions. I'm guessing that the $1.1 billion in unbilled revenues is going to come back to us in the third and fourth quarter, is that a fair assumption?

That is not correct, Lasan. It's a one-time adjustment. So it won't reoccur, but it's a one-time adjustment that doesn't necessarily come back. It will effect the earnings permanently for the year, but it won't reoccur again.

What was driving that? Can you explain that to me again?

In simplest terms the unbilled revenue when we acquired the Northern and Granite at the end of 2008 and we closed it, if you recall, in the last month, in December, when we closed the books in December the unbilled revenue balance was abnormally low at the end of 2008. As a result of that, when we got into the first and second quarter of 2009, we were recording unbilled revenue to bring that balance back in line with an appropriate level for the Granite and Northern assets. So there was essentially a higher amount of P&L impact, although it just brought the balance to the appropriate line during that first half of 2009. So that now when we get to 2010, and ended the year 2009 as appropriate unbilled or more normal unbilled balance. We don't see that pick up from the prior year like we did in 2009. So from a year-over-year comparison purposes, 2010 just is a lower P&L activity compared to 2009, although the unbilled balance is still at the right level.

I see. Okay. So a catch up accounting adjustment?

Yes.

Okay. On the electrics business and gas business, as well, it looks like weather normalized activity is picking up. Where do you see these activities coming from? Is it commercial customers, industrial customers? Can you give us a little bit more color on the pick up of the economic conditions and are you seeing any impact from energy-efficiency programs or do you expect to see any impact going forward?

As you know, we have been talking about the fact that over the last four years we actually saw year-over-year declines in electric usage and that was primarily due to two reasons one, conservation, as well as the price of energy. Just useful to remind people it was just two years ago that natural gas prices were at $15 and $16 at decatherm. They are now below $5 a decatherm.

This is the first year-over-year that we have actually seen an increase in electric sales and we've seen that primarily in two sectors. One, the residential sector, which is good news, because we see a bottoming-out effect, we think, of both price as well as conservation effects, as well as hopefully a pick up in the economy. We have also seen it in the large industrial sector. For a couple of reasons. One, because of natural gas prices and the ability to switch, a lot of our customers have dual-fuel capability. We have seen that switching happen, as well as some pick up in the overall economy. A little less clear on the commercial side, but the commercial sector will be a follow on, we think, to general pick up in the economy. On the gas side we have seen increases across the board and again, I think that is largely because of natural gas prices that are extremely low, as well as we have been fairly aggressive in pushing natural gas versus oil.

Is it fair to say that the rest of the year is looking cautiously optimistic?

Well, just judging over the last three or four weeks, I would say that is a good assumption. It's been very hot and humid up here and we would expect that would have a positive impact and continue hopefully the trend we have seen in electric sales. So yes, I would say we're off to a good start on the second half.

Excellent. Last question from me on the Unitil energy rate case filing and the Granite rate case filing, it looks like you are going to for an authorized return of 8.8% -- I'm sorry 10.7% on the equity. Does this get you all the way there or is there still going to be some regulatory lag?

Well, the process -- the way the process is structured, as you know Lasan, there is a regulatory lag between the time we file and get the rates into place. But in both jurisdictions, in both the New Hampshire filing and in the FERC filing with Granite, we are allowed to put in some pro forma or forecasted adjustment to the test year, which are designed to essentially address the regulatory lag issue and set your rates with some future cost increases in mind. In addition, in both jurisdictions, we have made proposals that are intended to help us better offset the effects of attrition or the impact that we see with the lag in the regulatory process, as well as the general ebb and flow of costs versus revenues.

In New Hampshire we have several step adjustments proposed, including the step adjustments to take place at the time permanent rates are initially set, and then future step adjustments based on some large capital additions we have in sub stations in the 2012-2013 timeframe, and then more of a rate-plan type of step adjustment, where we do it every year from 2011 through 2015 for reliability, enhancement and vegetation management program proposals we have made. Essentially those step adjustments are mini rate cases that allow us to adjust rates for costs and investments that we have made over that period without having to go in for a full-blown rate case. And they significantly reduce the regulatory lag.

And then just quickly on the FERC side with our Granite filing, we also proposed two adjustments there. One is to incorporate some capital additions that we're going to be making the rest of this year on that pipeline to bring it in line with pipeline integrity requirements and we have asked to incorporate that in the rate filing. Again, trying to address any regulatory lag associated with that investment. And then we have also proposed a capital surcharge or a capital tracker, that would allow us to incorporate about $12.7 million of additional investment through 2011-2013 through an annual step adjustments, which would, again, avoid the need for filing a full rate case and going through the full process, but would allow for a more expeditious regulatory process and filings for future capital investment.

Excellent. Thank you.

(Operator Instructions) Our next question comes from the line of Jairo Chung with Oppenheimer and Company.

Hi, how are you? I see that in your Q one of the reasons for the lower purchase power costs was a higher customer switching activity to third parties. Can you give us -- sort of let us know what is going on it terms of customer switching in your territory? Is this building momentum, where you expect more customers to switch out of your territory? Or to move on to third parties?

Bob talked a little bit about the falling gas prices that we're seeing in New England. In the New England region gas prices are also the dominant fuel for electric generation. So when we see falling gas prices there is a corresponding falling of electric prices in the markets, and primarily what drives customers to leave the default service or the basic service of the utility to go to the competitive market are wholesale market prices for electricity, in the case of electricity, and the lower gas prices in the case of gas. What we're seeing is that and more customers with current price levels are more comfortable going to the competitive market and getting better deals and longer term deals. We have seen that on the utility side and we have seen that for competitive afilliate, USource, which is a non-regulated energy broker and has had increased business related to that increasing area.

From a utility perspective, we do not have any earnings impact from whether customers take power directly from us or go to the competitive market. In fact, we have many assistance programs that are assisting customers going to the competitive market. Lastly, most of the switching still is in the largest customer commercial class. We have not seen any real significant penetration into, certainly, into the residential class or even into the small commercial class yet and that continues to be true. It is all happening at the larger customer class.

Okay. That is helpful. And just the second question is related to the cast-iron replacement issue in Maine. Now that there was approval given by the PUC, I guess it was done verbally, but what are the next steps we should look for?

The next step is really our rate case filing in Maine, which we're currently planning sometime early in 2011. We had, under our settlement agreement, we did have a stay-out until November and in the rate case filing we'll be filing along with that rate case filing a proposal for a cast iron replacement tracker, cost tracker, that would allow us, much like I was describing the step adjustments in New Hampshire and at the FERC, would allow us to move forward with an annual adjustment through a capital tracker mechanism. And the outline of that has been agreed to by the parties. We're awaiting the final order from the commission. They only have oral deliberations on this, but there are oral deliberations essentially agreed to a settlement agreement by the parties that provided for -- during the rate case for us to put forward a capital tracker and begin to recover the costs of the program under that. But those should be the next steps to look forward.

Okay. Great. Thank you very much.

Our next question comes from the line of Dan Fidell with Brean Murray, Carrett, please proceed.

Good afternoon.

Good afternoon, Dan.

Hi. Just a few housekeeping questions on my side. First, in terms of your pending filings for Fitchburg, are interim rates something that are available there?

They are not. The process in Massachusett's is a statutory process is basically a six month process, which is in itself, as you may be aware, is shorter than many jurisdictions, but there is no provision for any kind of temporary rate inside that six-month period.

Okay. Great. And then second, I know that you do have the stay-out provision for Northern, but I guess my question is in certain jurisdictions, regulators put in a provision for sort of an emergency filing ie if the ROE is really very low, and just noticing your last 12 month ROE and for Northern's, really very low, is there any chance of filing even before we get into early 2011?

Certainly, like all rate filings, we look at timing of that filing relative to earnings performance and other factors. There is always a potential of moving the filing either up a little or even back a little, depending on various factors. I think at this time, there is some benefit to us, Dan, of getting a good test-year, from which to make the filing from. And if there is a silver lining to a poor year in terms of earnings that we're seeing in Northern, that it does set us up well for a good test-year, in which to set rates on going forward.

Okay, great. Thank you. That is helpful. I guess maybe just one final question in terms of earnings guidance. I know you haven't provided it in the past, earnings have been bouncing around a little bit, obviously. You have a number of rate proceedings here in front of you that really can push the number higher into 2011 and beyond. I was wondering if you could sort of look into the next couple of quarters and see the trend ? I think another analyst earlier in the call had mentioned us seeing some positive things for Q3 and Q4. Is there any kind of help you can give us in terms of where you think 2010, a general range might be?

Again, what we're trying to do and hopefully you are finding some benefit from is to provide more clarity and more transparent information, either through the presentations that we're giving, through the conference calls and other forward-looking statements that we're able to make. I guess, just around that concept, again, looking at the components, we have talked a little bit about margin today. A lot of the margin in the first half was impacted by either an event that we don't expect to recur, such as the unbilled or the weather.

So in the second half of the year, we're looking at, as Bob indicated, we're getting off to a good start with the weather here in New England on the electric side, heating wise and the gas sales in the end of the year will depend on the weather, but outside of that, trends have been pretty good. Then on the O&M side, we talked a little bit about the run rate there and that the first half of the year is indicative of the run rate we expect to see for the remaining part of the year. The other components, depreciation and fixed costs, I think we talked about those. I think those trend pretty close to the type of capital expenditures we're making. So we hope that that is helpful.

I do recognize and we all recognize that the rate cases do make timing of their impact a little more difficult, but we have tried to at least give some more information relative to the current earnings level and the rate-based level, et cetera, of the different subsidiaries, so that you can make some, at least some better informed decisions on those.

Thanks. Appreciate the color and the presentation material is helpful. Thank you.

(Operator Instructions) Our next question is a follow-up from the line of Lasan Johong with RBC Capital Markets. Please proceed.

At the Massachusetts requiring everybody to file a decoupling program and energy-efficiency program with the next rate filing, can you give us a sense of what kind of a structure you are looking for on the decoupling side? And what kind of energy-efficiency program you would request?

Yes, let me start with decoupling. The decoupling side has already been the state's largest electric utility and a large gas utility in the state has already gone through. The decoupling and the terminology of the industry is being used as a full decoupling approach, and by that I mean, they don't strito figure out what part of sales reductions is due to energy conservation? What part is due to the economy? What part is due to changes in customers? Instead they simply take the total -- look at the total revenue of the utility and any changes in that due to changes in sales are delinked in their entirety. So it's a total decoupling approach.

There are slightly different methods being proposed and accepted by the department, but as a general matter they are allowing for, once rates are decoupled, they are allowing for future changes in the revenue over time to be linked to investments in the system. So instead of sales-driven model for regulatory recovery, it's more of an investment-driven model that allows you to put in, essentially through a type of step adjustment a format, changes in capital investment in your system and then earn on that under the traditional rate-blanking formula and increase revenue that way.

Excellent. Bob, what about the M&A environment right now? How do you assess the situation? Do you still see prospects for increasing activity?

I think as we have discussed in the past, our view has been that we would -- a couple of years ago we premised that we would see some of the larger players in the region begin to start rationalizing their holdings. Clearly the UIL announced yield with the EBITDA roll as a sign that that process has started the along with our acquisition of Northern. You obviously also, probably read, as we have read, the public comments from National Grid about their desire to exit New Hampshire. They own two properties in New Hampshire, Urban Energy North, which is a gas distribution company of about 90,000 customers and Garden State Electric, which is about 40,000 customers. Should they proceed and do that, clearly, that would be another example of the M&A activity is continuing. We have been pretty upfront about the fact that those kinds of assets would be of interest to us and should we get the opportunity, we would look closely at them.

Excellent. Thank you very much.

It appears there are no additional questions at this time. I will now turn the call back to Mr David Chong for closing remarks.

We thank you very much for your interest in today's call and please don't hesitate to call us with any questions that come to mind after this call. We certainly look forward to visiting with you again after the third quarter 2010. Thank you.

This concludes today's presentation. You may now disconnect. Good day.