Unitil Corp (UTL) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 Unitil Corporation earnings conference call. My name is Jasmine, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's 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 conference, Mr. David Chong, Director of Finance. Please proceed.

Good afternoon and thank you for joining us to discuss Unitil Corporation's second-quarter 2011 financial results. I am 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; Tom Meissner, Senior Vice President and Chief Operating Officer; 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 announcing the call, we have posted that information, including a presentation, to the Investors 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 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 listed or referred to on slide 1 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 will now turn the call over to Bob.

Thanks, David. Thanks for joining us today. I will begin by discussing the highlights of the quarter.

Turning to slide 5 of the presentation, today we announced a net loss of $800,000 or $0.08 per share for the second quarter of 2011. This is an improvement of $1.3 million or $0.11 per share compared to the second quarter of 2010.

The financial results for the quarter reflect strong growth in natural gas sales coupled with the successful completion of our electric base rate case in New Hampshire. With the delivery price of natural gas approximately half of the cost of fuel oil, more and more of our customers are choosing natural gas as a local, clean and affordable energy choice. We have seen a 9% increase in weather-normalized gas sales year to date over prior year, which is indicative of the increased demand for natural gas in our service territories.

We are making investments in our gas system to meet this growing demand, which should be sustainable, given the US's vast natural gas resources, including the Marcellus shale and other shale plays, which, combined, are estimated to meet US energy needs for over 100 years.

Turning to slide 6, we assembled an update of our recent rate case activity. On April 26, 2011, the New Hampshire Public Utilities Commission issued an order approving new base rates for Unitil Energy, our New Hampshire electric distribution utility. The order made permanent the temporary increase of $5.2 million in annual distribution revenue, which went into effect July 1, 2010, and provided for an additional increase of $5 million in annual revenue, which went into effect May 1, 2011.

The order includes a long-term rate plan and earnings-sharing mechanism with estimated future revenue increases of $1.5 million, $1.9 million and $1.4 million to occur on May 1 of 2012, 2013 and 2014, respectively, to support continued capital improvements, as well as an augmented vegetation management program and reliability enhancement program.

Finally, the order provides for recovery of deferred December 2008 ice storm and February 2010 windstorm costs over eight years in the form of a tariff surcharge and establishes a major storm reserve, which will be used to recover costs associated with responding to and recovering from future qualifying major storm events.

On January 14, 2011, we filed base rate cases for Fitchburg Gas & Electric Light Company, our Massachusetts combined 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 of base rate relief. We requested $4.4 million of base rate relief for our natural gas division.

In both rate 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 on or before August 2, 2011.

As we discussed earlier this year, the Federal Energy Regulatory Commission approved an increase of approximately $1.7 million in annual revenue, effective January 1, 2011, for Granite State, our interstate natural gas transmission pipeline. On July 26 of this year, an amendment to the original settlement agreement was filed with the FERC.

If approved, the amended settlement agreement would result in an increase of approximately $0.5 million in Granite State's annual revenues effective August 1 of this year. Under the amended settlement agreement, beginning in 2012, Granite State would also be permitted to limited rate adjustment filings to recover the revenue requirements for future capital cost additions to transmission plant for certain major planned project.

On slide 11, Northern Utilities, our gas distribution utility operating in New Hampshire and Maine, filed two separate rate cases in Maine requesting approval to change its natural gas distribution base rates with the New Hampshire Public Utilities Commission and the Maine Public Utilities Commission. The filings represent the first rate case in approximately 10 years for Northern Utilities' New Hampshire gas distribution operations and 28 years for its Maine gas distribution operations.

In New Hampshire, the Company has requested an increase of $5.2 million in annual gas distribution base revenue, which represents an increase of approximately 8.1% over total operating revenue. In Maine, the Company has requested an increase of $10.1 million in annual gas distribution base revenue, or an increase of approximately 16.7% over total operating revenue.

Both filings include a proposed capital cost recovery tracking mechanism to recover the future costs associated with cast-iron and bare steel pipe replacement programs. The rate case filings are subject to regulatory review and approval, with final rate orders expected in early 2012.

Other utilities has also requested temporary rates in both states. In New Hampshire, a settlement of temporary rates was reached among the Company, the Commission staff and the Office of Consumer Advocate. The settlement provides for a temporary rate increase of approximately $1.7 million in annual revenues to become effective as of August 1, 2011. On July 22, 2011, the New Hampshire Commission approved the temporary rate increase as filed in New Hampshire.

Once permanent rates are approved, they will be reconciled to the day temporary rates were established, August 1, 2011. The request for temporary rates in Maine remains pending before the Commission.

Finally, on slide 8, we focus on our nonregulated energy brokerage subsidiary, Usource. Usource continues to execute on its strategic growth plan. Usource revenues for the first six months of 2011 are up approximately $500,000 or 20% compared to last year. With natural gas prices remaining favorable and electricity prices lower and more stable, we expect continued strong demand for Usource's services.

Now I will turn the call over to Mark Collin, who will discuss our financial results for the past quarter.

Thanks, Bob. For the second quarter of 2011, we reported a net loss of $0.8 million or $0.08 per share. This is an improvement of $1.3 million or $0.11 per share compared to the second quarter of 2010.

For the six months ended June 30, 2011, the Company reported net income of $7.9 million or $0.73 per share compared to $4.4 million or $0.41 per share for the same period of 2010. Results for the second quarter and year-to-date period were driven primarily by higher natural gas and electric sales margins, reflecting increased sales and higher rates, partially offset by increases in operating and interest expenses.

The Company's financial results reflect the seasonal nature of natural gas business. Accordingly, results of operation will be positively affected during the first and fourth quarters, when sales of natural gas are typically higher, and negatively affected during the second and third quarters, when fixed gas operating expenses usually exceed sales margins in those periods.

Turning to slide 9, total therm sales of natural gas increased 15% in the six months ended June 30, 2011, compared to the same period in 2010, reflecting higher usage of natural gas by our large commercial and industrial customers, new customer growth, and the effect of colder weather in 2011 compared to 2010. Heating degree days in the first six months of 2011 were 10% greater than in the same period of 2010.

Excluding the effect of weather, on a weather-normalized basis, natural gas sales increased 9% in the six months ended June 30, 2011, compared to the same period in 2010, reflecting a growing number of customers choosing natural gas to heat and run their businesses and homes.

Turning to slide 10, electric kilowatt-hour sales increased 3% in the six months ended June 30, 2011, compared to the same period in 2010, reflecting higher average usage per customer, new customer growth and the effect of the colder weather. From a unit growth perspective, our weather-normalized kilowatt-hour sales during the first half of 2011 were up approximately 1% compared to last year.

Now let's turn to slide 11 to review corresponding variances in our sales margins. Natural gas sales margins increased $0.4 million and $4 million in the three and six months ended June 30, 2011, compared to the same periods in 2010. This is primarily due to higher unit sales of natural gas across all customer classes, new customer growth, and a colder winter heating season in the first part of 2011 compared to 2010.

Gas margin positively affected earnings by $0.22 per share in the six months ended June 30, 2011, compared to the same period in 2010. We estimate that the colder weather contributed to this increase in gas margin and earnings by about $0.08 per share in the six-month period compared to the same period in 2010 and $0.01 per share compared to normal weather.

The increase in electric sales margin reflects higher sales, as well as an electric rate increase implemented in July 2010 for our electric utility in New Hampshire. As a result, electric sales margin increased $2.7 million and $4.7 million in the three and six months ended June 30, 2011, respectively, compared to the same periods in 2010.

Electric margin positively affected earnings by $0.27 per share in the six months ended June 30, 2011, compared to the same period in 2010. We estimate that weather positively affected earnings about $0.02 per share in the six-month-ended period compared to the same period last year and $0.01 compared to normal.

Usource, the Company's nonregulated energy brokering business, recorded revenues of $1.4 million and $2.7 million in the three- and six-month periods ending June 30, 2011, respectively, increases of $0.3 million and $0.5 million, respectively, compared to the same periods of 2010.

Now, turning to operation and maintenance expenses, they increased $0.1 million and $0.9 million for the three and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The changes in O&M expenses for the six-month period reflect higher compensation and benefit costs, higher utility operating costs and higher professional fees, partially offset by a reduction of $1 million associated with the proceeds from an insurance settlement received in the first quarter.

Higher utility operating costs in the current period include approximately $0.3 million of increased spending on vegetation management and reliability enhancement programs. These costs are recovered through cost-tracker rate mechanisms that result in corresponding increases in revenue.

Depreciation and amortization expense increased $0.5 million and $1.3 million in the three and six months ended June 30, 2011, compared to the same periods in 2010, reflecting higher depreciation on normal utility plant additions and higher amortization expense in the current year, including the amortization associated with the recovery of previously deferred storm costs.

Local property and other taxes increased $0.5 million and $0.7 million in the three- and six-month periods, respectively, compared to the same periods in 2010, reflecting higher property and payroll taxes.

Net interest expense increased $0.3 million and 0.6 million in the three- and six-month periods ended June 30, 2011, respectively, compared to the same periods in 2010. The increases in the three- and six-month periods ending June 30, 2011, are due to lower interest income recorded on regulatory assets, which are being recovered in rates, and the issuance of $40 million of long-term notes by Unitil Energy and Northern Utilities in March of 2010.

Federal and state income taxes increased $0.7 million and $2.2 million for the three- and six-month periods due to higher pretax earnings in 2011 compared to 2010.

Finally, on slide 12, 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). Robert Howard, Prospector Partners.

Just a couple things. One, on that last slide with the rate case schedule, when this set of cases is complete, is that it? Or, I guess, do you see it as a continual cycle? Or do you see it as, okay, we get these done, we're going to take care of rate cases for a significant amount of time?

Yes, that's a good question, Bob. This is Bob Schoenberger. As we have been discussing with our shareholders over the last year or so, our main goal is to reset rates in all of our jurisdictions so that we're obviously meeting our costs, but also to realize the full earnings power of those assets.

It's fully our intent that, when we are through with these rate cases, that we will be able to stay out of rate cases for some period of time. Obviously, that all depends on the economy and lots of other things.

But I think, as you can see, some of the -- revenue decoupling in Massachusetts, the investment trackers in New Hampshire [on the new] pipeline -- those are all intended, I think, on the part of ourselves as well as the regulators, to allow us to recoup our costs on a going-forward basis so we don't have the need to go in for constant rate cases.

Okay. And is there any, I guess, savings? Or is it sort of an incremental cost of going through the rate case that would kind of go away, if we could say, okay, there's some savings after you have gone through this phase, or does it --

It's expensive to put on a full rate case, yes. And I think that's recognized by both, obviously, the Company as well as the regulators. So I think there's a recognition on the part of all the parties to these proceedings that it is not good public policy that companies are forced to come in every year for a rate case.

So I think that's why you're seeing commissions taking different approaches, but similar in nature in terms of allowing the Company to have not quite automatic, but reviewed automatic rate increases, particularly for capital investments, so that you stay out of having to come in every year.

Okay. And then another thing. Just, you know, in New England, Vermont Yankee is obviously an important source of power in the region, and just a lot of things happening there. I just wondered, is there anything that you have to do to prepare in case there is a shutdown or just in terms of make sure the system -- reliability standpoint? Is that an issue at all for you guys?

Well, I don't think it's an issue for us because the region, I think, has more than sufficient capacity to meet the energy needs of all the utilities in the region. And particularly with natural gas prices being as low as they are now, I think the availability of power to the region is obviously good. And as you know, there are some other proposals for bringing either Canadian Hydro or resources from other parts of Canada.

So I don't think, assuming that comes to pass, that that is going to be an issue for the region in terms of availability of energy supply.

Okay, great. And then lastly, just wondering, there's been a lot of M&A type stuff in New England. You've got the Nstar-NU and then you've got the Central Vermont. Just sort of wondered what your thoughts were on -- you've obviously gone through some M&A in the past -- where you kind of fit on that issue in the region and how it might impact you.

Well, it's sincere flattery that everybody's trying to copy what we've been doing over the last couple of years. But, you know, we said about five years ago that we felt that some of the smaller properties in the region, as the bigger companies began to look at what they owned, such as a national grid, that we would see some of this activity. And it's come to pass. So, obviously, Nstar and Northeast Utilities is obviously a different kind of case. So, again, we continue to be interested in trying to grow our Company that way, and we would expect that the kind of activity you have seen is probably going to continue.

Are there more utilities in that kind of small size that are around, small-town type things or something, that are --

There are still some remaining properties in the region that would fit what we have been talking about over the last three to five years.

Okay, great. Thank you very much.

(Operator Instructions). Peter Wernau, Wernau Asset Management.

Good quarter. Thanks for taking the call here. Wanted to ask a couple -- one initial question and then a follow-up. From a natural gas demand perspective, are you guys seeing that as a sustainable trend in terms of folks switching to natural gas commodity?

And then, as a follow-up, I guess the question would be around pricing of purchased gas and whether we see a long-term sustainable kind of low-cost model for that.

Peter, good to hear you. Let me deal with the first issue in terms of demand for natural gas in the region. To put it in perspective, in most of the United States, which heats with natural gas rather than fuel oil, the penetration of natural gas is 80% to 90%. In our region, in the territories we serve, it's more like 40%. So we really believe there's a lot of room for growth in terms of demand for natural gas services, given the fact that we use a hell of a lot less natural gas than the rest of the country.

Predicting future fuel prices of any kind is really kind of a fool's errand. But based on what we're seeing in terms of the supply that they keep on seeming to find in the US, I would be surprised to see natural gas prices run away from us now.

Now, will they stay half of what fuel oil prices are now? I can't predict that. But let's put it this way, I think we have a good -- we have a lot of running room here in terms of natural gas demand.

Great. Thank you so much.

And, ladies and gentlemen, this concludes our question-and-answer session for today. Thank you for your participation. You may now disconnect. Have a wonderful day.