Unitil Corp (UTL) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 Unitil Corporation earnings conference call. My name is Keisha and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I'd now like to hand the conference over to Mr. David Chong, Director of Finance. Please proceed.

Good afternoon, and thank you for joining us to discuss Unitil Corporation's third-quarter 2011 financial results.

With me today are Bob Schoenberger, Chairman, President, and Chief Executive Officer; Mark Felling, 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 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 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 strategies, 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. Thank you for joining us today. I will begin by discussing the highlights of our financial performance year to date in 2011.

If you could turn to slide 5 of the presentation, today we announced net income of $6.3 million or $0.58 per share for the nine months ended September 30, 2011, compared to $4.3 million or $0.40 per share for the same period of 2010.

Results for the nine-month period reflect increased electric and gas sales margins and volumes across all of our distribution utilities. Our year-to-date financial results reflect our rate case activity and the impact of rate relief across all of our utility subsidiaries.

As we move forward to 2012, we will see the full annualized impact of rate relief in our financial results. For the third quarter, we reported a net loss of $1.6 million or $0.15 per share compared to a net loss of $100,000 or $0.01 per share for the third quarter of 2010.

During the third quarter of 2011, our Massachusetts distribution utility completed its electric and natural gas rate cases, which provided a combined annual revenue increase of $7 million, electric and gas revenue decoupling mechanisms and recovery of the December 2008 ice storm costs.

In the third quarter of 2011, in connection with this rate case, we recognized a nonrecurring pretax charge for $2 million or $0.11 per share related to the December 2008 ice storm. Overall, we are pleased with the outcome of the Massachusetts electric and natural gas rate cases, which provide meaningful revenue support to serve our customers and continue to make capital improvements. But probably most importantly, the conclusion of the rate cases finalizes all outstanding regulatory and cost recovery matters pertaining to the December 2008 ice storm in front of the Massachusetts Department of Public Utilities.

Also, just as a reminder, our results in the third quarter reflect the seasonal nature of the natural gas business. As we have stressed in the past, one of our primary strategies in 2011 was to reset rates at all of our utility subsidiaries in order to realize the full earnings potential of the company.

Turning to slide 6, we have assembled an update of our recent rate case activity. We have completed rate cases at Unitil Energy Systems, our New Hampshire electric distribution utility, Granite State, our interstate natural gas transmission pipeline, and Fitchburg Gas & Electric Light Company, our Massachusetts combination gas and electric distribution utility. We fully expect to complete, as we promised, our regulatory agenda to be to reset rates for all of our operating companies by the first quarter of 2012.

I discussed the results of our Unitil Energy and Granite State rate cases during last quarter's earnings call, so I won't go into much detail on those two cases. However, I would like to spend a minute on some additional details on the Fitchburg rate cases, which we completed in the third quarter.

On August 1, 2011, we received the final order for the Massachusetts Department of Public Utilities for base rate cases we filed in January for both of the gas and electric divisions. The order approved increases of $3.7 million and $3.3 million in annual distribution revenues for Fitchburg's Gas and Electric divisions, respectively. The order approved revenue decoupling mechanisms and a return on equity of 9.2% for both divisions of the company.

The rate increase for Fitchburg's Electric division included a recovery of $11.4 million of previously deferred emergency storm restoration costs associated with the December 2008 ice storm, which costs are to be amortized and recovered over seven years without carrying costs. As a result, as I discussed earlier, we recognized a one-time nonrecurring pretax charge of $2 million in the third quarter to charge off previously accrued carrying costs of $1.8 million and other previously accrued expenses related to the ice storm. The order provides resolution to the open regulatory matters concerning the rate-making treatment and cost recovery related to that event.

Also, during the third quarter, we completed legal briefing and oral argument before the Massachusetts Supreme Judicial Court seeking to reverse and vacate a 2009 order of the Massachusetts Department of Public Utilities requiring Fitchburg's Gas Division to refund gas costs based on a review of our gas purchasing practices in 2007 and 2008. We previously took a charge of $4.9 million in the fourth quarter of 2009 for this matter. A decision from the court is anticipated by the end of the year.

Turning to slide 7, Northern Utilities, our gas distribution utility operating in New Hampshire and Maine, filed two separate rate cases in May, requesting approval to change its natural gas distribution base rates with the New Hampshire Public Utilities Commission and the main Public Utilities Commission. The filings represent the first rate case in approximately 10 years for Northern Utilities New Hampshire operations and 28 years for its Maine gas operations. We requested increases of $5.2 million and $10.1 million in annual gas distribution base rate revenues in New Hampshire and Maine, respectively. Both filings include revenue increases for an initial step increase to reflect 2011 capital spending. The rate filings are subject to a regulatory review and approval with final rate orders expected in early 2012.

In New Hampshire, a settlement of temporary rates was reached among the company, the commission staff, and the Office of Consumer Advocate. The settlement provided for a temporary rate increase of approximately $1.7 million, which became effective August 1, 2011. In New Hampshire, once permanent rates are approved, they will be reconciled to the date of temporary rates going back to August 1 of this year. Hearings on permanent rates before the New Hampshire Commission are currently scheduled for the end of March 2012.

In Maine, after nearly six months of comprehensive testimony, review and scrutiny of our filing, we have recently entered into a comprehensive settlement agreement with all active interveners in the docket, including the Maine Office of Public Advocate. The comprehensive settlement agreement supports our request for a temporary annual increase in revenue of $3.5 million effective November 1, 2011, a permanent annual increase in revenue of $7.8 million effective January 1, 2012, and a permanent annual step increase in revenue of $0.8 million to recover the cost of 2011 cast-iron capital spending effective May 1, 2012.

Hearings before the Maine Commission on the comprehensive settlement agreement happened today. Deliberations for the temporary annual increase in distribution revenue are scheduled for tomorrow, October 28.

Finally, slide 8 talks about our non-regulated energy brokering subsidiary, Usource. Usource continues to execute on its strategic growth plan. Usource's revenues for the first nine months of 2011 are roughly up approximately $800,000 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.

With that, I will turn the call over to Mark, who will discuss our year-to-date and quarterly financial results in more detail. Mark?

Thanks, Bob. For the nine months ended September 30, 2011, the company reported net income of $6.3 million or $0.58 per share compared to $4.3 million or $0.40 per share for the same period of 2010.

For the third quarter of 2011, we reported a net loss of $1.6 million or $0.15 per share compared to a net loss of $0.1 million or $0.01 per share for the third quarter of 2010. Results for the nine-month period reflected increased electric and gas sales margins and volumes and a rate relief across all of Unitil's distribution utilities.

Our financial results reflect the seasonal nature of the natural gas business. Accordingly, results of operations 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.

Now turning to slide 9, total therm sales of natural gas increased 13% in the nine months ended September 30, 2011 compared to the same period in 2010, reflecting higher uses of natural gas by commercial and industrial customers, growth in new customers, and the effect of colder weather earlier in the year.

Heating Degree Days in the first nine months of 2011 were 9% greater than in the same period in 2010. Excluding the effect of weather, on a weather-normalized basis, natural gas sales increased 9% in the nine months ended September 30, 2011 compared to the same period 2010, reflecting a growing number of customers choosing natural gas to heat and run their businesses and homes.

Now turning to slide 10, electric kilowatt hour sales increased 0.3% in the nine months ended September 30, 2011 compared to the same period in 2010. The increase reflects higher sales to residential customers, partially offset by lower sales to commercial and industrial customers. The increase in residential sales reflect customer growth and the effect of colder winter weather earlier in the year, partially offset by the effect of cooler summer weather in 2011 compared to 2010. From a unit growth perspective, our weather-normalized kilowatt hour sales during the first nine months 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 $0.3 million and $4.3 million in the three and nine months periods ending September 30, 2011 compared to the same periods in 2010. This was primarily due to higher unit sales of natural gas across all customer classes, new customer growth, and a colder winter heating season in the early part of 2011 compared to 2010.

Gas margin positively affected earnings by $0.25 per share in the nine months ended September 30, 2011, compared to the same period in 2010. We estimate that the colder weather contributed to this increase in gas margins and earnings by about $0.08 per share for the nine-month period. Compared to normal, we estimated that whether positively impacted our earnings by about $0.01 per share in the nine-month period.

The increase in electric sales margin reflects electric rate increases implemented in July 2010 for Unitil Energy and in August 2011 for the electric division of Fitchburg. Electric sales margin increased $0.9 million and $5.6 million in the three and nine-month periods, respectively.

Electric margin positively affected earnings $0.32 per share in the nine-month period compared to the same period in 2010. We estimate that weather negatively impacted our year-to-date earnings by about $0.01 per share compared to the same period last year.

Compared to normal, we estimate that weather positively impacted earnings by about $0.04 per share in the nine-month period, driven by the warmer summer we had this year compared to normal. Usource, the company's non-regulated energy brokering business, recorded revenues of $1.5 million and $4.2 million in the three and nine-month periods ending September 30, 2011, respectively, increases of $0.3 million and $0.8 million respectively compared to the same periods of 2010.

Operation and maintenance expenses increased $0.5 million and $1.4 million for the three and nine-month periods. The changes in O&M expense for the nine-month period reflect higher utility operating costs of $1.8 million and higher compensation and employee benefit costs of $1 million, partially offset by a reduction of $1 million associated with the proceeds from an insurance settlement and lower professional fees of $0.2 million and lower other operating costs of $0.2 million.

Utility operating costs in the nine-month period include approximately $0.8 million of increased spending on vegetation management and reliability enhancement programs. These costs are recovered through cost tracker mechanisms that result in corresponding increases in revenue.

Depreciation and amortization expense increased $0.8 million and $2.1 million in the three and nine-month periods, reflecting normal utility plant additions and a change in depreciation rates, resulting from the company's recent base rate case in Massachusetts.

Local property and other taxes increased $0.5 million and $1.2 million in the three and nine-month periods, compared to the same periods in 2010. These increases reflect higher local property taxes and higher levels of utility plant in service.

Net interest expense increased $1.9 million and $2.5 million in the three and nine-month periods, respectively. The increases in the three and nine-month periods ending September 30, 2011, are primarily due to lower interest income recorded on regulatory assets, including a nonrecurring pretax charge in the third quarter of 2011 against interest income of $1.8 million related to the final order issued by the Massachusetts Department of Public Utilities relating to the December 2008 ice storm; 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 decreased by $0.8 million for the three months ended September 30, 2011. Federal and state income taxes increased by $1.4 million in the nine-month period due to higher pretax earnings in 2011 compared to the same period in 2010.

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 costs to serve and to support our operating costs and capital expenditure program. We look forward to updating you as we complete the individual rate cases.

One last important item -- on October 12, 2011, we entered into a Fifth Amendment agreement to our revolving credit facility. Under the Fifth Amendment, we increased the commitments on the facility from $80 million to $115 million. The interest rate decreased 25 basis points from LIBOR +200 basis points down to LIBOR +175 basis points, reflecting a lower negotiated credit spread. We are pleased in the continued support of our banking group and availability of low-cost capital.

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). Michael Gaugler, Brean Murray.

Just one quick question -- taking a look going forward now that your rate case activity is winding up and you're going to be more incentivized to invest, I'm wondering if you can give us some guidance on where you think CapEx will be out for 2012 and perhaps even as far out as 2013.

Yes, Mike, this is Mark. We've got -- our CapEx is -- we've been hovering between $55 million and $60 million on an annual basis. We think this will continue to be in about that range. We're going to hold pretty steady in that range. Even with some of the incentives we have, there's some capital expenditures that are winding down and others ramping up in particular on the gas side of the business, where we are going to be focusing more on the activity relative to the cast iron replacement program. So, into 2012, '13 even '14, we should continue to be in the $55 million to $60 million range or so.

Okay. That's all I had, gentlemen. Thank you.

(Operator Instructions). We have no further questions in queue at this time. I would like to thank everyone for their participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.