Unitil Corp (UTL) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Unitil earnings conference call. My name is Fab and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. If at anytime during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr. David Chong, Director of Finance. Please proceed.

Good afternoon, and thank you for joining us to discuss Unitil's third quarter 2010 financial results. I'm David Chong, Unitil's Director of Finance. 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 third quarter on this call. As we mentioned in the press release, we have posted that information, including a presentation, to the investor section of our website at www.Unitil.com.

We will 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 statements include statements regarding the Company's financial condition, results of operations, capital expenditures and other expenses, regulatory environment strategy, market opportunities and other plans and objectives. In some cases forward-looking statements can be identified by terminology such as may, will, should, estimate, expect or believe.

The negative such terms or other comparable terminology. These forward-looking statements are neither promises nor guarantees but involve risk 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 and those detailed in the Company's filings with the Securities and Exchange Commission including the Company's form 10-K for the year-ended December 31st, 2009. 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. Good afternoon, everyone. I would like to turn to slide three of the presentation and talk about the third quarter of 2010. Year over year our financial results improved. We reported a net loss of $0.01 per share compared to $0.06 per share in the third quarter of 2009. Again, 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. Mark will soon go over our financial results in detail shortly, but let me highlight the major drivers in the quarter.

This July was the second hottest July in New England since 1960 which set an all-time record for electricity consumption in New England for one month. Furthermore, we also had temporary rates in affect July 1st at Unitil Energy, our electric distribution utility in New Hampshire which helped improve our electric margins. On slide four, we have outlined again our key strategies for you again. To unlock the full earnings power of our distribution utilities, our regulatory strategy entails base rate case filings in all off our utility operating jurisdictions through the end of 2011.

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. Now turning to slide five of the presentation as I mentioned earlier, the New Hampshire public utilities commission approved a temporary rate increase of $5.2 million per year effective July 1st, 2010 for a Unitil Energy subsidiary.

The temporary rates include $500,000 for storm cost recovery and another $500,000 for the recovery of tree trimming expenses. Most recently the commissioned audit staff conducted a review of Unitil energy expenses for the test year ended December 31st, 2009. The audit was conducted over the course of four months and included over 120 data requests. On September 22nd, 2010, the commission audit staff issued the final audit report. Overall we are very pleased with the final audit report which represented the successful completion of another milestone in Unitil Energy's rate case proceeding.

Looking ahead in the procedural schedule, we anticipate receiving testimony from the commission staff as well as the office's consumer advocate in early November. 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 July 1st, 2010.

Now, let me discuss another important development in respect to our rate case activity on slide six. As you may remember , our natural gas pipeline subsidiary, Granite State Gas Transmission filed a base rate case for an initial annual increase in revenues of approximately $2.3 million. This rate case was filed with the federal energy regulatory commission on June 29th, 2010. Granite's initial proposed rate increase is effective January 1st, 2011, subject to refund and the outcome of hearing and settlement procedures which are currently underway.

At our Massachusetts combination gas and electric distribution utility in Fitchburg we will file rate cases for both our gas and electric operations before year-end. 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.

On slide seven, I would like to turn your attention to another order that the New Hampshire public utilities commission recently issued. We all recall the significant ice storm that occurred in December of 2008 that caused widespread interruptions in electric service across the region. On September 24th, 2010 the commission issued an order that concluded Unitil acted reasonably during the December 2008 ice storm. We look forward to working with the commission staff in continuously improving the efficiency and timing of our response to weather-related events.

In fact, as the slide indicates, we have made sweeping changes throughout the Company to attain a premiere emergency response organization. This hard work paid off earlier this year during the February 2010 windstorm which was the second worst natural disaster in New Hampshire history. Turning to slide eight, we show our commitment to the dividend since 1984 we have continuously paid quarterly dividends and we have never reduced our dividend rate. Our dividend yield is currently about 6% which we believe offers an attractive source of cash on cash yield for our investors.

We remain committed to our regulatory strategy and we believe that we will be able to achieve the full earnings power of our utilities by the end of 2011. Let me change gears and discuss the economy and the impact on the Company. We are continuing to see signs of improvement in the local economy. On a weather normalized basis we have continued to see increases on electric sales over the prior year. New England still has one of the stronger economies in the country with unemployment rates that continue to beat the national average in all three of our service states.

In New Hampshire we have seen residential home sales rise over 15% and average residential sale prices increase 4% in the first half of the year compared to the same period last year. Maine has shown signs of a positive turn around as well with job growth returning in the first quarter of 2010. Overall we remain cautious, but hopeful that we will continue to see improvements in the region's economy. Now I will turn the discussion over to Mark to discuss our financial results for

Thanks, Bob. I would also like to thank everyone for joining us today. This afternoon we announced a net loss of $0.1 million or $0.01 per share for third quarter of 2010 compared to a net loss of $0.6 million or $0.06 per share for the third quarter of 2009. For the nine month period we reported net income of $4.3 million or $0.40 per share compared to $8.7 million or $0.94 per share for the same period of 2009.

I would like to point out that 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 our interstate gas transmission pipeline, Granite.

The average share outstanding for the current period in prior periods are shown on slide three of the presentation. In addition, as Bob indicated earlier, the Company's financial results are seasonal in nature which is apparent here in the third quarter as they were in the second quarter when gas sales are substantially lower.

As Bob mentioned earlier, our financial performance in the third quarter showed improvement over last year. Most of this improvement came from increased electric sales margins which were driven by favorable summer weather and electric rate increase for our Unitil Energy rate case. Turning to slide nine, total kilowatt hour sales increased 11% in the three months ended September 30th, 2010 compared to the same quarter in 2009. On a year to date basis, electric kilowatt hour sales are up about 5%. We estimate that the favorable weather positively impacted electric earnings about $0.07 per share in the third quarter compared to the prior year.

Now let me turn to our gas unit sales on slide 10. In contrast to the benefits weather has had on our electric sales, the warmer than normal weather had a significant impact to our natural gas sales during the first nine months of 2010. As you know, gas sales are much more sensitive to weather than electric sales. Total unit sales of natural gas decreased 5% in the nine months ended September 30th, 2010 compared to the same period in 2009.

There were 13% fewer heating degree days in a nine-month period compared to the same period last year. In the third quarter of this year, sales of natural gas decreased 3%. Weather does not have as material affect on our gas sales during the third quarter so we attribute these lower sales primarily to normal variations in seasonal uses patterns of our customers. Overall we estimate weather negatively impacted earnings for our gas operations by about $0.13 per share in the nine month period ending September 30th, 2010. As Bob mentioned earlier, we may have seen some improvements in our organic electric and gas sales.

Year to date, our weather -- on a weather normalized basis we have seen an approximate 1% increase in total unit sales for our electric operations, and for our gas operations, our year to date unit sales are flat compared to last year. We are encouraged that this is a sign that our sales downturn has bottomed out and we are beginning to see a rebound. Now let's turn to slide 11 and let me spend a minute reviewing variances in our sales margins, operation and maintenance expenses and our fixed costs including depreciation and amortization, property taxes and interest expense.

Although gas unit sales were lower in the third quarter this year, natural gas sales margin was unchanged compared to the same period in 2009 reflecting a higher average per unit margin year over year. For the nine month period gas sales margin was $3.8 million lower compared to the same period in 2009. As we previously discussed, the lower gas sales-- therm sales, in the Company's utility service territories year to date primarily reflects the effective warmer winter temperatures early in 2010.

Electric sales margins increased $2.4 million and $2.5 million in the three and nine month ended September 30th, 2010, reflecting higher electric kilowatt hour sales and an electric rate increase implemented in July 2010 for Unitil Energy. The increased sales reflect above average summer temperatures in the Company's utility service territories in 2010. Now let's turn to expenses. Operation and Maintenance expenses were approximately $13 million for the third quarter 2010 and $37 million year to date. The changes in O&M expenses compared to prior year reflect higher year over year utility operating costs and professional fees. Also as a reminder utility operating expenses in 2010 reflect a full integration of Northern Utilities and Granite State into the Company's consolidated operating results.

Depreciation and amortization expense decreased $0.4 million and increased $1.1 million in the three and nine months ended September 30 respectively, compared to the same periods in 2009, reflecting increased depreciation on normal utility planned additions partially offset here in the third quarter by lower amortization expense. Similarly, local property and other taxes increased $0.3 million and $0.7 million in the three and nine month periods ended September 30th respectively. These increases reflect increased local property taxes on higher levels of utility plant and service and increased payroll taxes.

Net interest expense increased $0.7 million and $1 million in the three and nine month period respectively. In March 2010, Unitil Energy and Northern Utilities collectively issued $40 million of long-term debt which is contributing to the increased interest expense in 2010.

Now, let me change topics and follow-up to Bob's earlier discussion on our rate case activity. On slide 12 we have provided an update to our utility operating results by operating company. In the 12-month period ending September 30th, 2010 Unitil Energy, our New Hampshire-based electric distribution utility had a return on equity of 4.4%, excluding the effect of the effective rate increase. Fitchburg, our Massachusetts-based combination gas and electric distribution utility had an overall return on equity of 6.3% and Northern Utilities our gas distribution utility in Maine and New Hampshire had a return on equity of 0.2%. Finally our interstate gas transmission pipeline, Granite, had a return on equity of 4.7%.

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. 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 costs and capital expenditure program. We look forward to updating you as new developments arise on this front.

Now let me spend a minute on slide 13 which provides an overview of our recently renewed credit facility. On October 8th, 2010, we renewed our credit facility for a new three-year term ending -- extending it until October 2013. The commitments on the facility remain at $80 million with flexibility for us to request subject to lender approval an additional $20 million of commitments for a total borrowing limit of $100 million. The pricing on the facility generally is 200 basis points over LIBOR. Overall we are very pleased with our banking relationships and that we continue to access the capital markets on attractive terms.

We believe that our new credit facility provides a strong liquidity profile for the foreseeable future. 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.

Thank you. (Operator Instructions). And your first question will come from the line of Emily Christy from RBC Capital Markets.

Good afternoon. As we enter a heating season in New England. I was wondering if you could give us an update on the oil to gas customer switching efforts?

Yes. Hi, Emily, this is Mark. I guess two things, we've been out fairly aggressively converting customers, and there's been a real increase in the number of customers that we're adding. We're on pace to add about 1400 new customers to the system who are mainly on the main or accessible on our existing system and are converting over from oil heat -- oil-based heat over to natural gas heat as a primary driver bringing them on particularly in the residential class. In the commercial class we are seeing more dual fuel customers coming on and switching over to gas. As a general rule, we continue to be about 25% to 30% more competitive on a price basis versus heating oil compared to natural gas.

Hi, Emily, this is Bob. Both states, New Hampshire and Maine, have been very active in encouraging us to penetrate the market with additional gas.

Okay. And then just separately a couple of your peers just joined forces. I was wondering if that changes the M&A landscape for you guys at all going forward?

No, I think our view -- I mean obviously we saw what you saw. Our view is that what we've said before remains true. Public statements by National Grid signaled its intent to get out of New Hampshire, and if they move on that desire to get out of New Hampshire and the price is right, those are assets that we would be interested in. I think the merger of Nstar and Northeast Utilities I think would lead me to believe that they have plans in the future to look at assets larger than the ones I just mentioned.

Okay, great. Thanks very much.

(Operator Instructions). And your next question will come from the line of Jairo Chung from Oppenheimer & company.

Hello, how are you?

How are you?

Pretty good, thanks. I know that you guys said $0.07 was the weather benefit versus 2009. I was wondering what the benefit was versus normal.

Yes indeed. In a general matter the 2009 was a season that was a little bit cooler than normal so that it would dampen that a little bit. But as a general matter it would be in the similar range.

Okay. It's just that in 2009 weather was very much cooler than normal?

The weather was a little cooler than normal in 2009.

Okay, so then most of the $0.07 might have -- be due to the warmer weather this year.

Yes over last year, but also over normal. This summer was, I think as Bob indicated, was the second warmest summer in July in particular since 1960. So clearly this was an above normal summer in terms of average temperature. I think I saw a statistic that indicated that average temperatures were about 4% higher this summer than prior summers. So it was a nice, warm summer and clearly contributed to our results.

Okay, great. And when I look at slide 13 I see that the equity ratio to be slightly below 40%. Is there any plans to improve that equity ratio as you guys continue to file for rate cases?

Yes, I mean, I think that's the whole driver -- one of the drivers behind the rate case. I think it gives us an opportunity to improve our earnings which it has both complements in terms of being able to retain more of our earnings for -- to meet our capital expenditures and don't need to finance -- go to the external markets to finance as much. As we bring our earnings power of our utilities in line, I think that we will see an improving equity ratio as well.

Okay, so not prior to resetting of the rates though?

Yes, That's accurate.

Okay. Great, thank you very much.

And there are no further questions in the queue. That does conclude today's question-and-answer session. I would now like to turn the call back over to management for closing comments.

Well, thank you very much, everyone, for joining our call. If there are any follow-up questions you can reach us in the office. Thank you very much.

Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.