Unitil Corp (UTL) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2010 Unitil earnings conference call. My name is Katie and I'll be your coordinator for today. At this time, all participants will be in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. (Operator Instructions)I would like to now hand the call over to your host for today, Mr. David Chong, Director of Finance. Mr. Chong, over to you, please.

Thank you. Good afternoon and thank you for joining us to discuss Unitil's fourth quarter and year-end 2010 financial results. I'm David Chong, Unitil's Director of Finance and with me today are Bob Schoenberger, Chairman, President and Chief Executive Officer, Tom Meissner, Senior Vice President and Chief Operating 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 fourth quarter and year-end results on this call. As we mentioned in the press release announcing the call, we have posted that information, including our presentation, to the Investors section of our website at www.unitil.com.We will refer to that information during this call. The presentation also includes a reconciliation of non-GAAP financial measures with comparable GAAP financial measures.

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 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, estimate, expect, or believe, 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 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 31, 2010. 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'll now turn the call over to

Thanks, David. I'd like to begin by discussing the highlights of the past quarter and the year. Turning to slide four of the presentation, today we announced earnings applicable to common shareholders of $9.5 million or $0.88 per share for the full year of 2010. This compares to earnings of $9.9 million or $1.03 per share in 2009. In the fourth quarter of 2010, we recorded earnings of $0.48 per share, compared to earnings of $0.11 per share in the fourth quarter of 2009. As we discussed last year, we recorded a non-recurring accounting charge of $4.9 million for a gas refund in the fourth quarter of 2009, which negatively impacted earnings by about $0.30 per share in that quarter.

Our fourth quarter 2010 results were driven by increased unit sales resulting from an improving economy and the temporary distribution rate relief from place at our New Hampshire electric utility. Importantly in 2010, we ended a period of sales decline. On a weather normalized basis, electric unit sales in 2010 increased approximately 1.6% year-over-year, and 2.9% in the fourth quarter, compared to 2009. Weather normalized natural gas therm sales for the full year 2010 were essentially flat with therm sales in 2009. And importantly, increased approximately 2% in the fourth quarter.

As you can see, our 2010 sales, especially in the fourth quarter, reflected solid growth for both electric and gas operations. In addition, as we've highlighted over the past year, we are executing our strategic plan highlighted on slide five. To unlock the full earnings power of our distribution utilities, our regulatory strategy entails base rate case proceedings in all of our utility operating jurisdictions through the end of 2011. During this process, we expect to reset our base distribution rates which would allow us to earn -- allow our distribution utilities to recover their cost of service and earn a compensatory return.

Now turning to slide six, on July 1, 2010 we obtained a temporary rate increase of $5.2 million per year at Unitil Energy Systems, our New Hampshire electric distribution subsidiary. We are currently in settlement discussions regarding the permanent rate level and a long-term rate plan which will include future rate step adjustments to track capital spending without the need for a full rate case proceeding. A final hearing is scheduled for late February. Permanent rates would go into effect May 1 of this year, but will be reconciled back to the date of temporary rates, July 1, 2010.

Moving to slide seven. Granite State Gas Transmission pipeline reached a settlement agreement on the base rate case that it filed in June of last year. On November 30, 2010, a settlement was filed based on new gas transportation rates effective as of January 1, 2011. Final approval of the uncontested settlement by the FDRC was received earlier in the week on Monday, January 31, 2011.

On slide eight, on January 14, 2011, we filed base rate cases for both Fitchburg Gas and Electric, our Massachusetts combination gas and electric distribution utility. We requested $7.1 million of rate relief for electric division, which includes annual recovery of deferred storm costs of $2.2 million, and $4.9 million of base rate relief. We requested $4.4 million of base rate relief for our Natural Gas division.

In the Electric division rate case, we included a proposal to lower the Company's existing transition charge to completely offset the requested increase in electric revenue, so that our electric customers will see no increase in their total bill. We are also seeking approval of a revenue decoupling proposal for both the electric and gas divisions, similar to those already approved for other utilities in Massachusetts.

In addition, our electric and gas decoupling proposals include annual adjustments for capital spending, which provides for more of an investment-driven rate recovery model. We expect to obtain a final rate order by August 2, 2011. At Northern Utilities, our gas distribution utility operating in New Hampshire and Maine, we expect to file a base rate case for both our New Hampshire and Maine divisions in the second quarter of this year. We expect to request temporary rates with final rates in place in early 2012.

Turning to slide nine, I'd like to discuss our gas distribution expansion strategy. In 2010, our customer addition rate was about 2% last year, despite a poor housing economy and little to no growth in population. This strong customer growth rate is in large part a direct result of our marketing efforts to focus on adding customers along our existing Maine, particularly when we are already in the street for other projects such as our Cast Iron Replacement Program. In 2011, we will continue our multi-year Cast Iron Replacement Program to replace natural gas distribution lines throughout the city of Portland, and the surrounding areas in Maine. We also have a similar program in New Hampshire and our Fitchburg territory in Massachusetts. These programs aim to improve safety and increase deliverability by modernizing and upgrading our gas distribution system to meet the growing demands for natural gas.

On slide ten, we focus on our non-regulated energy brokering subsidiary, Usource, which earned $0.14 per share in 2010. Usource services 1,200 customers in 18 states, and had a 98% retention rate last year. With natural gas prices remaining favorable compared to oil, we expect continued strong demand for Usource's services.

On slide 11, we show our commitment to the dividend. Since 1984, we have continuously paid quarterly dividends, and we have never reduced our dividend rate. Dividend yield is currently about 6% which we believe offers and attractive source of cash-on-cash yield for our investors.

Finally, we expect to show marked improvement in our financial results and achieve our assets' full earnings potential in 2012. Now I'll turn the call over to Tom who will discuss our capital budget and operational highlights.

Thanks, Bob. Good afternoon. I'd like to start by going over our capital plans for 2011 if you would please go to slide 12. We plan to spend a total of $57 million across our entire Company in 2011. In our electric division, we plan to invest a total of $22 million, and in our gas divisions, we plan to invest $32 million. The remaining $3 million represents spending on IT and office facilities.

The higher spending in our gas division is primarily attributed to pipe replacement projects including cast iron and bare steel pipe replacement programs totaling about $9 million in 2011. Combined maintenance capital spending between the gas and the electric divisions is about one-third of our total capital budget and combined growth capital spending is approximately another one-third of our combined capital budget. The remaining one-third of the budget includes the pipe replacement projects I already mentioned as well as electrical liability enhancement projects and spending on IT and office facilities.

Turning to slide 13, we continue to invest in technological improvements in our utility infrastructure to enhance our operational performance. In 2010, we launched new outage management system for both our electric and gas distribution systems. These technology systems are used to centralize critical planning processes and facilitate safe and efficient restoration of service to customers following an interruption. These systems are currently being interfaced with our corporate website so our customers will be able to obtain live and current restoration information through the Internet.

Another important development in 2010, advancements to our gas safety program. We continue to strengthen pipeline safety programs and emergency response capabilities including advancements to training and personnel protective equipment to our emergency first responders. Our dedication to safety was recognized recently by the Northeast Gas Association where we were the recipient of the NGA's first ever Excellence In Safety And Health Award, a new program where all of our first responders were trained and outfitted with state-of-the-art safety equipment.

Now, I'd like to spend a minute talking about electric system reliability. We benchmark our reliability against other New England utilities. In order to develop a consistent benchmarking approach, we correct for some of the differences in service territory characteristics by normalizing on the basis of customer density. As seen in the chart on slide 14, the Company develops a range of reliability performance by plotting reliability as a function of the number of customers per mile of overhead distribution line. This methodology addresses, at least to an extent, the concern of whether utility's territory is rural versus urban and more accurately reflects circuit miles of line exposure to various outage causes.

Unitil Energy's reliability as measured by SAIDI, or the System Average Interruption Duration Index, has typically been in the bottom half of the range which is indicative of good performance. A lower number on this chart corresponds to better performance because SAIDI corresponds to the number of minutes customers are without power.

To meet increased reliability expectations and requirements in our recent rate case filings we have requested enhancements to our reliability and vegetation management programs throughout our electric service territories. I would now like to turn the call over to Mark who will discuss our financial results for the quarter and the year.

Thanks, Tom. For the 12 months ended December 31, 2010, we reported earnings of $9.5 million, or $0.88 per share, compared to earnings of $9.9 million or $1.03 per share for the same period in 2009. For the full year 2010, the earnings compared to 2009 reflect the nonrecurring gas supply refund in the prior period, lower year-over-year natural gas sales margins, and higher operating and interest costs reflecting a fully integrated cost structure from our Northern Utilities acquisition.

We announced higher earnings of $5.2 million or $0.48 per share for the fourth quarter of 2010, compared to earnings of $1.2 million or $0.11 per share for the fourth quarter of 2009. The increased earnings in the fourth quarter of 2010 compared to 2009 primarily reflect the gas supply refund and were also driven by higher natural gas and electric sales margins due to sales growth and higher electric rates at Unitil Energy, our New Hampshire electric utility.

The $4.9 million gas refund in the fourth quarter of 2009 negatively affected earnings in the prior period by about $0.30 per share. As a reminder, earnings per share in 2010 compared to 2009 are not directly comparable. Because we issued shares during the first half of 2009 to finance the acquisition of our newest gas LDC, Northern Utilities, and the interstate gas pipeline, Granite State Gas Transmission. The average shares outstanding for the current and prior periods are shown in slide four of the presentation. In addition, the Company's financial results are seasonal in nature which is apparent here in the fourth quarter, when gas sales are substantially higher.

One of the major drivers behind our financial results is the impact of the local and regional economy on the Company. We are continuing to see signs of improvement in the local and regional economy, and on actual and weather normalized basis we have seen increased electric sales over the prior year, and here in the fourth quarter. Gas sales have also shown good growth in the fourth quarter, when our sales and marketing efforts during the construction season really begin to show up in our winter sales figures. New England 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 territories. Overall, we remain encouraged that we will continue to see improvements in the regional economy.

Now turning to slide 15, electric kilowatt hour sales increased 4.5% in 2010. In terms of weather, the summer of 2009 was much warmer than the cool summer we had in 2009. There was over 60% more cooling degree days in the three-month period ended September 30, 2010, compared to the prior year. According to ISO New England, the grid operator for the New England region, July of 2010 was the second hottest July in New England since 1960 and New England's all-time electricity consumption for one month was recorded in that month. While the change in summer weather, as measured by cooling degree days, was up significantly, I'd like to highlight that electric earnings are not as sensitive to weather as gas as many of the end uses of electricity such as lighting are not impacted by the weather.

In addition, approximately 50% of our electric distribution revenue is derived from non-volumetric changes such as the monthly customer charge which is not affected by the weather. Thus, we estimate that earnings were positively impacted about $0.06 per share in 2010 compared to 2009 and $0.03 per share compared to the normal 30-year average. From a unit growth perspective, our weather normalized kilowatt hour sales in 2010 increased approximately 1.6% year-over-year, and 2.9% in the fourth quarter, compared to 2009.

Now turning to slide 16, the mild winter at the beginning of 2010 had a significant impact to our 2010 natural gas sales. There were 9% fewer heating degree days in the year ended December 31, 2010, compared to the same period last year, and sales of natural gas decreased 3.2%. Our gas earnings are much more sensitive to weather, both because the primary use of gas for many of our residential and commercial customers is heating, and because the higher proportion, approximately 80% of our gas distribution revenue is derived from weather-sensitive volumetric charges.

Overall, we estimate weather negatively impacted earnings from our gas operations by about $0.12 per share in 2010, compared to 2009, and again $0.12 per share compared to normal 30-year average. From a unit growth perspective, our weather normalized natural gas therm sales for the full year of 2010 were essentially flat with therm sales in 2009, and increased approximately 2% in the fourth quarter, primarily reflecting new customer growth.

Now let's turn to slide 17 and let me spend a minute reviewing variances in our sales margins. The increase in electric sales margin reflects the higher electric unit sales previously discussed, and electric rate increase implemented in July 2010 for our electric utility in New Hampshire. As a result, electric sales margin increased $2.3 million and $4.8 million in the three months and 12 months ended December 31, 2010, compared to the same periods in 2009. Natural gas sales margins increased $1.2 million in the fourth quarter of 2010, compared to the fourth quarter of 2009, excluding the prior period gas refund discussed earlier.

On a full fiscal year basis, natural gas sales margins decreased $2.6 million in 2010 compared to 2009, again, excluding the gas refund. This was primarily due to lower sales of natural gas resulting from a milder winter heating season in the early part of 2010, compared to 2009, which resulted in there being 9% fewer heating degree days overall in 2010 compared to the prior year.

Usource, the Company's non-regulated energy brokering business recorded revenues of $4.6 million in 2010, an increase of about $0.3 million compared to 2009.

Now let's turn to expenses. Operation and maintenance expenses increased $4.1 million in 2010 compared to 2009. O&M expenses were $48.8 million in 2010. The increase in O&M expenses year-over-year reflects higher compensation, retiree employee benefit expenses of $2.7 million, and other higher utility operating costs, partially offset by lower professional fees related to regulatory and legal matters.

Utility operating costs primarily consists of utility distribution and transmission system maintenance costs, bad debt expenses, customer service expenses and insurance costs. O&M expenses in 2010 also reflect the full integration of Northern Utilities and Granite State into the Company's consolidated operating results.

In 2009 the Company recognized $3 million related to regulatory and legal matters concerning the devastating ice storm that struck the New England region in December 2008.

Depreciation and amortization expense increased $1.5 million in the 12 months ended December 31, 2010, compared to the prior period in 2009, reflecting higher depreciation on normal utility plan additions. Local property and other taxes increased $0.8 million in the 12 months ended December 31, 2010, compared to the same period in 2009. These increases reflected increased local property tax rates on higher levels of utility plant and service and increased payroll taxes.

Net interest expense increased $2.3 million in the 12 month period ended December 31, 2010, compared to the same period in 2009. In March 2010, Unitil Energy and Northern Utilities collectively issued $40 million of long-term debt which contributed to the increased interest expense in 2010.

On slide 18, we have provided an update to our utility operating results by operating Company together with our projected rate case schedule. Our regulatory agenda is extremely important to bring our distribution revenues back in line with our cost to serve and to support our operating costs and capital expenditure program. We look forward to updating you as we complete individual rate cases.

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) Eric McCarthy from Praesidis Asset Management.

Can you hear me?

Yes, hi, Eric.

Hi. Okay. Could you detail or provide any guidance in terms of financing plans for 2011, what we have planned there in light of the $57 million capital budget you laid out?

The bulk of our capital spending we intend to finance from internally generated cash. At this point, our financing plan is to continue to finance our funding from cash flows which we expect to improve in 2011, as well as from our existing credit facilities and lines with our banks.

Okay. So no equity through either DRIP or [DRIBBLE]?

We do have a regular DRIP program which we operate from year to year and that contributes a little over $1 million to financing sources for our capital program as well.

Okay. So far this reporting period bonus depreciation has been a commonly discussed topic. Any investments that were made in the 2010 calendar year that would qualify for bonus depreciation that might bring a little extra cash in the door in '11?

Yes, a large percentage of our capital spending qualifies for bonus depreciation. So we have been taking advantage of that in our tax returns and that will continue to benefit us significantly on a going forward basis, as, again, a majority of our capital actually qualifies for bonus depreciation.

Okay. And lastly, I apologize if I missed it in the first few minutes of the call, but could you detail where the settlement stands in New Hampshire?

We've had several meetings with the New Hampshire PUC staff and the office of Consumer advocates. We have another scheduled meeting next week and we're hoping to be able to reach settlement and get a final settlement in order to present that to the Commission in late February and move forward with that. But the discussions have gone well. We've worked for a number of months with both the staff and the OCA on coming up with a settlement that we think can work and go forward with not only for the current rate period, but provide a long-term rate plan that would allow us to stay out of rate cases in the future and focus on investments in improving service to customers.

Any important dates upcoming that we should be watching for in those proceedings?

Again, when we file the settlement, which should be within let's say for on the outside, the next three weeks or so, we will put out an 8-K, basically highlighting the key terms of the settlement. So that would be an important item to watch out for. And then after the proceeding, once we receive the commission order, we will announce that either in the quarterly report that may be filed around that time or in an 8-K as well.

Okay. All right. Thank you.

(Operator Instructions) [Hakid Dori] from Robert W. Baird.

Hello, Hakid?

Your line is open, sir. You may proceed with your question.

Can we go to the next one?

Dan Fidell from Brean Murray Carret.

Just a broader picture question. Looks like the ducks are laying out pretty nicely with the rate cases all rolling in here over -- looks like over a 12 month period here. Can you give us a little bit of a bigger picture sense in terms of where you stand on the M&A past those rate cases? Is it pretty much blocking and tackling on the T&D side of things or are acquisitions still something that you're considering?

Yes, as we've discussed before, we are always on the watch for assets that we can acquire that make sense for us, so we actively continue to look at assets that may be for sale in the region and we continue to expect assets to be for sale within the region. So I would probably expect over the next, say, 12 months to 24 months that we may see some of those assets come to market.

Is there anything in specific you can give us, anything in your regions, specific names that you're willing to share at this point?

No, because it's very hard for us to judge the difference between what we hear may be happening and what actually happens.

Understood. Thanks very much for your comments today.

[Hakid Dori] Robert W. Baird.

Sorry about that earlier.

No problem.

I wondered if you could speak a little bit about your decoupling plans ins Massachusetts. I know that one of your peer utilities accepted a low ROE, considerably below 10% in order to get that decoupling mechanism approved and I wondered how you view the balance between return on equity allowances versus the completion of the decoupling mechanism?

Yes, they're both important ingredients in rate filings in Massachusetts. I guess, first off, is that the policy, the rate making policy in Massachusetts requires all utilities to move to a decoupling plan, both gas and electric. So our proposal is in compliance, essentially, with the requirements in Massachusetts that we do decouple and it's designed, as you're familiar, to remove the disincentive for utilities engaging in aggressive energy conservation programs and energy efficiency, that is inherent in sales-based revenue growth and by removing that the desire of the Commonwealth, shared goal is to increase energy efficiency and the use of it for meeting our customers' needs.

There has been a lot of discussion over -- given the nature of decoupling and moving from a sales-based model to what is an investment-based model because under the decoupling proposals in Massachusetts, they've established adjustment mechanisms after the initial rates are set to allow the utility to adjust their rates on a going forward basis, not only based on changes in sales that may result from energy efficiency programs, but also based on investments that the utility makes in its system on the gas side.

Typically those are around cast iron and bare steel type replacement programs like we're doing in our other service territories. On the electric side, there's a high degree of reliability investments and system improvements and just infrastructure replacement programs, all of which we'll be able to, under the decoupling mechanism, have essentially a form of step adjustment to bring those into rate as we make those over time. The ROEs that are being awarded in Massachusetts are -- when you look across the nation, New England historically has been on the lower end of the spectrum in terms of ROE allowance but the range that they're coming in is fairly -- is in that around 10%, maybe a little lower than 10% and that typically is what we're seeing awarded across most of the jurisdictions in New England.

Our goal, we look at that as one of the components of the total revenue requirement that you need to focus on the many different ingredients and factors that go into setting rates and, yes, get an adequate rate of return but also get good, sound cost recovery of your various investments, not only in the current period but on a going forward basis, and we think we can get a program put together on a rate recovery basis in Massachusetts that will be acceptable and one that will work for us on a going forward basis.

I guess it's frustrating to see that they're forcing you to commence decoupling on the one hand and on the other hand arguing that has reduced your risk although you're not choosing to the take that away from yourselves as an argument for them offering lower ROEs. Little frustrating to see I guess what's going on in Massachusetts. I wish you much luck on your rate case.

Thank you.

We appreciate it.

(Operator Instructions) At this time, I'm showing you have no further questions. I'd like to now turn the call back over to management for closing remarks.

Thank you very much everyone and we look forward to talking to you next quarter. This concludes our call.

Ladies and gentlemen, thank you very much for your participation in today's conference call. You may now disconnect. Have a wonderful day.