Unitil Corp (UTL) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2011 Unitil Corporation earnings conference call. My name is Shauntelay, and I will be your facilitator for today's call. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference.

(Operator Instructions)

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's call, Mr. David Chong, Director of Finance. Please proceed, Sir.

Good afternoon and thank you for joining us to discuss Unitil Corporation's first quarter 2011 financial results. I'm David Chong, Unitil's Director of Finance. With me today are Bob Schoenberger, Chairman, President and Chief Executive Officer, Tom Meissner Senior Vice President 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 first quarter on this call. As we mentioned in the press release announcing the call, 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. The presentation also includes 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 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 are the 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 and those detailed in the Company's filings with the Securities and Exchange Commission, including the Company's Form 10K 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 will now turn the call over to Bob Schoenberger.

Thank you, David. And I'd also like to thank you for joining us today. I will begin by discussing the highlights of the past quarter .

Turning to slide 5 of the presentation, today we announced earnings of $8.7 million or $0.81 per share for the first quarter of 2011. This compares to earnings of $6.5 million or $0.61 per share in the first quarter of 2010. First quarter 2011 results, were driven by increased unit sales, resulting from signs of an improving economy and favorable weather, as well as temporary rate relief in place at our New Hampshire electric utility. Our sales improved significantly in the first quarter of 2011, and continue to trend higher. On a weather normalized basis, natural gas therm unit sales increased 10% year over year while electric kilowatt hours unit sales, increased 4%, compared to 2010.

Turning to slide 6, we have an update on our customer satisfaction results for 2010. As you can see from the chart, Unitil's customer satisfaction ratings have consistently exceeded the Edison Electric Institute's national benchmark for residential customers. There is only one year, 2009, that was an exception. This dip in our customer satisfaction rating was largely due to the December 2008 ice storm. But, as we have indicated many times over the past couple of years, we have dramatically improved our customer and emergency response capabilities. In fact, Tom Meissner will discuss a management audit that we recently completed which provides an independent assessment of our activities during these past 2 years. As a result, you see that in 2010, our customer satisfaction rating improved significantly, and we once again exceeded the EEI national benchmark. We plan to continue our efforts in customer satisfaction and we expect to see continued improvement in this area.

Turning to slide 7, we entered into a comprehensive settlement agreement with the New Hampshire public utilities commission staff and the office of the Consumer Advocate in the electric base rate case filed by Unitil Energy last year. We expect the commission to issue its order in this proceeding within this week. If approved, the settlement will make permanent the temporary rate increase of $5.2 million per year, which went into effect July 1, 2010. And, provide for an additional rate increase of $5 million, which will go into effect May1, 2011.

The settlement extends through May 1, 2016 and includes a long-term rate plan and earnings sharing mechanism with estimated future rate increases $1.5 million, $1.9 million, and $1.4 million to occur on May 1, 2012, May 1, 2013, and May 1, 2014, respectively. The rate plan would allow Unitil to file for additional rate relief if the return on equity is less than 7%, and the sharing of earnings with customers, if its return on equity is greater than 10%, in a calendar year. The settlement provides that the authorized return on equity would remain at 9.67%, based on a capital structure that includes an equity ratio of 45% for rate making purposes.

The settlement also includes an augmented vegetation management program and reliability enhancement program which Tom will discuss shortly. The settlement includes recovery of deferred, December 2008 ice storm in February 2010 wind storm costs of approximately $7.6 million, including carrying charges. Recovery of these storm costs would be through a reconciling surcharge designed to recover these costs over a period of about 8 years. Finally, an annual major storm reserve of $400,000, would be established to recover costs associated with future qualifying major storm events.

Moving to slide 8, on January 14, 2011, we filed base rate cases for Fitchburg Gas and Electric Light Company, our Massachusetts combination gas and electric distribution utility. We requested $7.1 million of rate relief for our electric division, which includes annual recovery of deferred storm costs of $2.2 million and $4.9 million at base rate relief. We requested $4.4 million of base rate relief for our natural gas division. In both cases, we are seeking approval of a revenue decoupling mechanism, 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 from the Department of Public Utilities by August 2, 2011. At Northern Utilities, our gas distribution utility operating in Maine and New Hampshire, notices of intent to file base rate cases were submitted earlier this year. In early May, we expect to file complete base rate case filings in both Maine and New Hampshire. These filings are significant events for Northern Utilities, with the Maine filing the first rate case in 28 years, and the New Hampshire filing the first rate case in 10 years. Temporary rates will be requested to become effective in the third quarter of 2011 with final rates in place in early 2012. In summary, as we discussed before, upon completion of the Northern rate cases, we will have completed our regulatory agenda to reset rates at all of our distribution companies.

Slide 9 focuses on our non-regulated energy brokering subsidiary U Source, which earned $0.14 per share in 2010. U Source served over 1200 customers in 17 states and had a 98% customer retention rate last year. In the first quarter of this year, U Source revenues were up $200,000 over the first quarter of last year. With natural gas prices remaining favorable compared to oil, we expect continued strong demand for U Source services. Now, I will turn the call over to Tom Meissner, who will discuss a couple of operational highlights of the past

Thanks, Bob and good afternoon. First, I would like to discuss the results of the recently completed independent management audit on slide 10. This audit of Unitil management practices was required by the Massachusetts Department of Public Utilities and its order addressing Unitil's performance following the December 2008 ice storm that devastated many communities throughout Massachusetts and New Hampshire. The purpose of the audit was to review all of Unitil's management practices pertaining to its electric operations in Massachusetts and to evaluate whether the Company is prepared to meet its public service obligations to its customers under all circumstances including a significant power outage.

The scope of the audit involved a diagnostic review of the major functions of the Company including operations, internal controls, reliability, emergency response and communications. The audit report found that following the 2008 ice storm, the Company was responsive and undertook significant steps to improve overall performance, in particular, communications and storm response. The audit report also found that Unitil has a strong focus on reliability and that in comparison to its peer companies operating in New England, Unitil has historically been clustered within the result of the better performing utilities. Overall, we are pleased that a comprehensive and independent review has found that Unitil's management is sound and prepared to meet our customers needs under any circumstance.

Now, moving to slide 11, I'd like to follow up on Bob's earlier overview of the reliability enhancement in augmented vegetation management programs and our New Hampshire electric operations. If the Unitil energy settlement agreement is approved by the New Hampshire commission, in 2011 we will begin to target capital spending of $1.8 million annually as part of our reliability enhancement program. As proposed, this program will focus on areas such as system hardening measures, enhanced tree trimming, asset replacement and reliability based inspections and maintenance.

The second program included in the proposed settlement is an augmented vegetation management program. This program will focus on areas such as planned cycle and hotspot trimming, hazard tree removal and sub transmission right-of-way clearance. The goal is to define and implement the maintenance cycle that optimizes trimming frequency, clearance specifications and other factors to achieve the most cost-effective and reliable program.

Turning to slide 12, we continue to invest in our utility infrastructure to safely and reliably meet the service obligations to our customers. We have achieved a steady growth rate of 6% in net plans since 2008 following the Northern acquisition and look to continue that growth with a large capital projects in all of our divisions planned for the upcoming years. We have begun the Portland and Westbrook cast iron replacement program where over 100 miles of pipe will be replaced or upgraded over the next 14 years. In New Hampshire, we will be replacing all of our bare steel mains over the next 7 years.

At Unitil Energy, we are seeking approval to increase capital spending for the reliability enhancement program, beginning in 2011. And at Fitchburg, we are beginning a 3-year program to replace 40 miles of static wire on our electric transmission system. Also at Fitchburg, we are seeking approval to continue our cast iron and bare steel replacement program for the gas division as part of our decoupling proposal. I would now like to turn the call over to Mark Collin, who will discuss our financial results for the quarter and for the year.

Thanks Tom, good afternoon. The 3 months ended March 31, 2011, we reported earnings of $8.7 million, or $0.81 per share compared to earning $6.5 million or $0.61 per share for the same period in 2010. The increased earnings in the first quarter of 2011, compared to 2009, primarily reflect higher natural gas and electric sales margins, due to sales growth and favorable weather as well as higher electric rates at Unitil energy, our New Hampshire electric utility.

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 substantial increases in both gas and electric sales over the prior year as Bob indicated earlier.

Turning to slide 13, total therm sales of natural gas increased 13% in the 3 months ended March 31, 2011, compared to the same period in 2010. Reflecting higher usage by our large commercial industrial customers and the effect of colder winter weather in the first quarter of 2011 compared to 2010. Heating degree days, in the first quarter of 2011, were 6% greater than the same period in 2010.

On a weather normalized basis, natural gas sales increased 10% in 3 months ended March 31, 2011, compared to the same period in 2010. We estimate weather positively impacted earnings from our gas operations by $0.03 per share in the 3 months ended March 31, 2011, compared to the same period in 2010 and $0.01 per share compared to normal.

Turning to slide 14, electric kilowatt hour sales increased 5% in the 3 months ended March 31, 2011, compared to the same period in 2010 reflecting an improving economy and the effect of colder weather. As discussed above, this winter was colder than last year, with 6% more heating degree days in this quarter compared to prior year. From a unit growth perspective, our weather normalized kilowatt hour sales during the first quarter of 2011 increased approximately 4% compared to the first quarter of 2010.

While the change in winter weather is measured by a heating degree days increase, 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 half of our electric distribution revenue is derived from non-volumetric charges such as monthly customer charge, which is not affected by the weather. Thus, we estimate the earnings were positively impacted about $0.01per share in the 3 months ended March 31, 2011 compared to the same period last year, and a minimal impact compared to normal.

Now, let's turn to slide 15 and let me spend a minute reviewing variances in our sales margins. Natural gas sales margins increased $3.6 million in the first quarter of 2011. This was primarily due to higher unit sales of natural gas resulting from an improving economy and a colder winter heating season in the early part of 2011. 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 New Hampshire.

As a result, electric sales margin increased $2 million in the 3 months ended March 31, 2011. U Source, the Company's non-regulated energy brokering business, reported revenues of $1.3 million in the first quarter of 2011. An increase of $200,000 compared to the same period in 2010.

Now, let's turn to expenses. Operation and maintenance expenses increased $800,000 in the first quarter of 2011, compared to 2010. The increase in O & M expenses, primarily reflects a higher year-over-year utility operating cost, higher professional fees and employee and retiree benefit cost, partially offset by the receipt of gross proceeds from an insurance settlement of about $2 million, related to environmental issues at a former manufactured gas plant site at Sawyer Passway located in Fitchburg Massachusetts.

Insurance recoveries like this related to former, MGP sites are shared equally between the Company and its gas customers, pursuant to an improved environmental remediation cost recovery agreement in Massachusetts. Depreciation and amortization expense increased $800,000 in the 3 months ended March 31, 2011, compared to the same period in 2010, reflecting higher depreciation on normal utility plan additions and higher amortization expense in the current period.

Local property and other taxes increased about $200,000 in the 3 months ended March 31, 2011. These increases reflected increased local property tax rates on higher levels of utility plant and service. Net interest expense increased about $300,000 in the 3 month period ended March 31, 2011. The increase is primarily due to the issuance of 40 million of long term notes by Unitil Energy and Northern Utilities, Inc. in March 2010.

On slide 16 we 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 of served 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. Thank you.

(Operator Instructions)

There are no questions in the audio queue, I would like to turn the conference back over to Mr. David Chong. Please proceed,

Thank you very much for joining us for this quarter's conference call and we look forward to talking with you next quarter. Thank you. This concludes our call.

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