Unitil Corp (UTL) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2011 Unitil 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. You may proceed.

Good afternoon and thank you for joining us to discuss Unitil Corporation's fourth-quarter and full-year 2011 financial results. I am David Chong, Unitil's Director of Finance.

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 full-year 2011 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 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, 2011. Forward-looking statements speak only as of the date they are made and 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. I would like to thank everyone for joining us this morning. I will begin by discussing the highlights of our financial performance in 2011.

Turning to slide five of the presentation we provided, today we announced net income of $16.3 million or $1.50 per share for the full year of 2011. Our earnings in the fourth quarter of 2011 were $10 million or $0.92 per share.

We had a great year, recording the highest net income in our history and achieving significant year-over-year earnings growth. These results were primarily driven by our regulatory agenda to reset base rates in all of our service areas and strong growth in our natural gas and energy brokering business.

We expect to realize the full-year impact of our rate case results and continued strong gas demand in 2012. Mark will provide more detail on our financial results in a few moments.

Turning to slide six, we have assembled an update of the six base rate cases we have undertaken for all of our operating utilities in the last year or so. We have one final remaining gas rate case which is nearing completion with settlement proceedings currently in process for the New Hampshire division of Northern Utilities. This rate case is on schedule and is going well.

Slide seven summarizes the base distribution revenue increases that we have achieved at each of our utility operating companies. Collectively, these rate cases have generated an increase of approximately 30% to our total base distribution revenues. The full impact of these rate cases will be achieved in 2012 which will provide substantial earnings support for this year.

Importantly, in addition to the initial base rate relief we have achieved, we have also put in place some longer-term capital cost trackers providing annual rate step adjustments to recover the costs of our growing investment in future years without the need to file full base rate cases.

Slide eight focuses on our nonregulated energy brokering subsidiary, Usource. Usource continues to execute on its strategic growth plan with revenues for 2011 up approximately $900,000 or 20% compared to last year. That contributed $0.15 to EPS in 2011.

Usource currently has a forward book of $4.5 million of revenue under contract which provides revenues and earnings for the future. With natural gas prices remaining favorable and electricity prices lower and more stable, we would expect strong continued demand for Usource's services.

Turning to slide nine, we have highlighted the total shareholder return for Unitil stock over the past year compared to the S&P Utilities and the S&P 500 indices. We had a 32% total shareholder return last year, significantly outperforming the utility sector as well as the broader market.

We believe that our key strategic initiatives over the past few years, including our emphasis on customer service and satisfaction, our regulatory agenda to reset based distribution rates across our operating utilities, and our focus on natural gas customer growth, have all been key contributors to the stock price appreciation and the total shareholder return in 2011. We will continue to execute on our strategic plan to generate value for our shareholders.

Now with those highlights I will turn the call over to Tom who will discuss our capital budget and operational highlights.

Thanks, Bob. I would like to start by going over our capital budget for natural gas additions in 2012. If you would please go to slide 10.

We expect to spend about $34 million on gas construction projects in 2012, which is consistent with our spending levels in 2011. Spending on new customer additions will be a significant component of this budget.

In 2011 we saw a 2.5% increase in the number of gas customers and a corresponding increase in unit sales of 8.1% year over year. For 2012 we expect to spend about $9 million or 26% of our capital budget on further expansion of our natural gas delivery system targeting new customers and increased sales.

Another major category of spending is infrastructure replacement. We are in the midst of major cast iron and bare steel replacement programs in all three of our state jurisdictions. We plan to spend about $13 million or 38% of the gas capital budget on infrastructure replacement, which also contributes to customer growth since we target new customers while we are in the street making for easier, less expensive customer conversions.

Finally, we will be investing in several major pipeline upgrade and replacement projects for Granite State interstate gas transmission pipeline. These projects include upgrades associated with pipeline integrity management, a major bridge relocation, and replacement of a section of pipeline in New Hampshire.

The cost of these projects is expected to average of about $3 million to $4 million -- $3 million annually over the next three to four years. Under a rate of agreement approved by the Federal Energy Regulatory Commission in 2011 these costs will be included in Granite's rate base and recovered through rate mechanisms without the need to file a full rate case.

Overall, our investment in natural gas assets has resulted in significant growth in net utility plant of roughly 9% per year over the last three years. In 2012 we will be fully earning on the assets that have been placed into service to date while future expansion of these assets will provide opportunities to grow earnings over time.

Turning to slide 11 we have provided our Electric capital budget for 2012. Total spending for the Electric division is projected to be $23 million, which is also consistent with spending levels in 2011. Capital expenditures for new customer additions and related upgrades comprise $8 million or about a third of our Electric budget.

In the Electric division we also have capital trackers that provide substantial annual recovery of plan investments. For example, at Unitil Energy we budgeted capital spending of $14 million and we have a rate mechanism that will allow us to recover at about 80% of the change in net plan through annual step adjustments without the need to file a full rate case.

In Fitchburg, we will be investing about $3 million in transmission system upgrades in 2012, which will be included in rate base and recovered through a formula rate mechanism in our annual transmission rate filing with the Federal Energy Regulatory Commission. Overall, we have seen growth in our electric net utility plant of about 4% per year which we are fully recovering in the rates in 2011. In addition, our capital cost trackers will provide incremental recovery of capital expenditures in future years.

Before I turn the call over to Mark I would like to take a moment to discuss two major weather events that impacted our region in 2011. Please turn to slide 12.

On August 28 Hurricane Irene made landfall in New England bringing severe flooding and damaging winds. Our electric service territories experienced significant power outages due to the high winds. At the storm's peak about a third of our electric customers were without power. As a result of our advanced preparations, we were able to restore service to all our customers across all regions within about 36 hours.

Following Irene just two months later, we were hit with a devastating October snow storm that brought widespread power outages to the Northeast. At the peak of that event approximately 75% of our electric customers were without power. We were the first utility in both New Hampshire and Massachusetts to have power restored to all our customers, having restored service to most customers within three days.

We received praise from all of our key constituents including customers, municipalities, elected officials, and regulators all acknowledging the quality of our communication and the speed of our restoration efforts.

Restoration costs for these major storms are estimated to be about $4 million and $6 million, respectively, for Hurricane Irene and the October snow storm. We are currently seeking recovery of these costs in New Hampshire under a special surcharge. Recovery of storm costs in Massachusetts will be deferred until the time of our next rate case.

Now I will turn it over to Mark Collin who will discuss our 2011 and quarterly financial results in more detail.

Thanks, Tom, and good morning. For the full year of 2011 the Company reported net income of $16.3 million, or $1.50 per share, an increase of $6.8 million, or $0.62 per share, compared to 2010. For the fourth quarter of 2011 we reported net income of $10 million, or $0.92 per share, compared to earnings of $5.2 million, or $0.48 per share, for the fourth quarter of 2010.

Results for 2011 reflect higher natural gas and electric sales margins partially offset by higher utility operating interest costs. Fourth-quarter results include a nonrecurring pretax credit of $4.7 million in connection with our appeal and the resulting favorable ruling vacating a 2009 regulatory order that had resulted in a previous charge-off of purchased gas costs.

Also included in our results for the full year is a nonrecurring pretax charge of $2 million recorded in the third quarter related to the resolution of the December 2008 ice storm cost recovery in the Fitchburg electric rate case. The net effect of these two nonrecurring items on 2011 full-year earnings is about $0.15 per share.

As a reminder, 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 13. Total therm sales of natural gas increased 8.1% in 2011 compared to 2010. The increase in gas therm unit sales reflects a 2.5% customer addition rate across residential and commercial and industrial business customers during the year, increased gas usage, and colder weather in 2011 compared to 2010, particularly in the first quarter of 2011.

On an annual basis heating degree days in 2011 were about 4% greater than in 2010. Compared to normal there were about 5% fewer heating degree days in 2011. Excluding the effect of weather, on a weather-normalized basis natural gas sales increased 7% in 2011 reflecting new customer growth and increased gas usage.

Turning to slide 14, electric kilowatt hours sales decreased 0.5% in 2011 compared to the same period in 2010. The decrease reflects lower sales to commercial industrial business customers, partially offset by slightly higher sales to residential customers.

The increased sales to residential customers reflect customer additions partially offset by the effect of weather in 2011 compared to 2010. There are about 15% fewer cooling degree days in 2011 compared to 2010. From a unit growth perspective, on a weather-normalized kilowatt hours sales during 2011 increased 0.4% compared to 2010.

As we have mentioned in our base rate case updates, our Massachusetts distribution utility, Fitchburg Gas & Electric, now operates under a revenue decoupling mechanism. This mechanism decouples sales and revenues as an incentive for utilities to encourage energy conservation programs.

Under the revenue decoupling mechanism Fitchburg will recognize distribution revenues based on established revenue targets regardless of actual sales. The established revenue targets for the gas division may be subject to periodic adjustments to account for customer growth and special contracts with large users.

As a result of decoupling, the sales margins resulting from revenue decoupled sales are no longer sensitive to weather and economic factors. We estimate that revenue decoupled sales units represent approximately 25% and 10% of Unitil's total consolidated annual electric and natural gas sales volumes, respectively.

Now let's turn to slide 15 to review corresponding variances in our sales margins.

Sales margins are derived as total operating revenues less cost of sales and are the appropriate indicator of the Company's top-line financial performance, rather than revenues which reflect changes in both sales volume and commodity prices. For instance, commodity prices have been in steady decline this year, which reduces revenue, but has no affect on our sales margins from which income is derived.

Natural gas sales margins increased $11.1 million in 2011. This represents a 20% increase in gas sales margins year over year. This change reflects an increase in gas sales, higher base distribution rates, and the recovery of purchased gas costs that had previously been charged off in a prior period. Overall, gas margin positively affected earnings by $0.62 per share in 2011 compared to 2010.

We estimate that weather positively affected our 2011 earnings by approximately $0.03 per share compared to 2010. However, compared to normal, as opposed to compared to the prior year, 2011 was milder than normal and we estimate that weather negatively impacted earnings by about $0.04 per share.

The increase in electric sales margin reflects higher base distribution rates on lower unit sales. Electric sales margins increased $7.6 million in 2011. This represents a 13% increase in electric sales margins year over year. Electric margin positively affected earnings $0.43 per share in 2011 compared to 2010. We estimate that weather had a relatively minor impact on our 2011 earnings compared to prior year and compared to normal.

Usource, the Company's nonregulated energy brokering business, recorded revenues of $5.5 million in 2011, an increase of $900,000 year over year.

Now turning to operation and maintenance expenses. They increased $2.7 million for the 12 months ended December 31, 2011, compared to the same period in 2010. The changes in O&M expenses for the full year 2011 reflect higher utility operating costs of $1.9 million and higher employee compensation and benefit costs of $1.8 million, partially offset by a reduction of $1 million associated with the proceeds from an insurance settlement.

Utility operating costs in 2011 include approximately $1.7 million of spending on vegetation management and reliability enhancement programs. The cost of these programs are recovered through cost trackers that result in corresponding increases in revenue.

Depreciation and amortization expense increased $0.4 million in the 12 months ended December 31, 2011. These changes reflect normal utility additions and retirements, amortization of previously deferred storm charges, and adjustments to the depreciation rates resulting from the Company's recently completed base rate cases.

Local property and other taxes increased $1.8 million in 2011 compared to 2010. The increase reflects higher local property taxes and higher levels of utility, plant, and service.

Net interest expense increased $2.3 million in the 12-month period ended December 31, 2011. The increase in 2011 is primarily due to lower interest income recorded on regulatory assets, including the nonrecurring pretax charge in the third quarter of 2011 against interest income of $1.8 million related to the final regulatory order issued in our Massachusetts base rate case. Interest expense also reflects the issuance of a total of $40 million of long-term notes by Unitil Energy and Northern Utilities in March 2010.

Federal and state income taxes increased $5.5 million due to the higher pretax earnings in 2011.

Finally, turning to slide 16, we have provided an update on our operating results at the utility operating company level. The chart shows the last authorized return on equity compared to the actual ARM return on equity for each of the operating companies. With the completion of the rate cases across all of our utility companies, we are bridging the gap between the last authorized and the actual earned return on equity.

Looking forward, as Bob and Tom have briefly highlighted, we have put in place longer term capital cost trackers to recover a significant portion of our future capital spending. The combination of the rate relief we achieved this past year, future annual cost tracker rate adjustments, and sales growth will provide meaningful earnings support going forward. We will also continue to evaluate the financial results of each of our operating utilities to determine the need for future rate relief.

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. Thank you.

(Operator Instructions) [Peter Hark], ZLP.

Yes, good morning. I have several questions if you have a moment. First, referencing slide seven, I think, that shows the cumulative effect of rate increases throughout I think 2010 and 2011, it shows a total to date of around $28 million. How much of that do you think was recognized in 2011 and how much of that might roll into 2012?

Hi, Peter; this is Mark. What we have tried to do on the slide and the best way to determine that is under each of the operating utilities where we show the total rate relief there is a date listed. And that date is the effective date of when the rate went into effect.

So in the case of the first one, Unitil Energy, you see a May 1, 2011, date so you can have a proportional effect on that revenue you see there. Roughly 5/12 has been recognized -- I am sorry 7/12 was recognized in 2011 since the rates went in effect 5/1 and the full 12 months worth will be recognized in the following year.

I didn't know if it was that mechanical in terms of doing a pro rata allocation, or, for instance, in Unitil Energy you missed the entire first quarter of 2011 with that rate increase. And so would there be a disproportionate amount of the 10.2 that would show up in the first quarter of 2012? First and -- actually second half of the second quarter too?

Yes, there are some nuances and, as a general overview when you are looking at the total, they are not going to have a material impact on the allocation from the current period, 2011 to 2012. For instance, in Unitil Energy there is a temporary rate period which is reconciled in the earlier part of the year. So part of that actually did have some impact in the first quarter.

But because of the step adjustment nature of the Unitil Energy rate case which stepped up the rates significantly on 5/1, the pro rata allocation continues to be a fairly good approximation of the impact from year to year.

In addition, all these are -- exclude any kind of pickup that you would get on the rate change for sales increases. So these do only reflect a change in the rates in the test year, so to the extent that there is increases in sales those are not reflected in these numbers.

Thank you. Then on New Hampshire I was hoping you could update us on where settlement discussions are right now. I see on the ROE slide where between that and the rest of Northern in Maine the earned return is around 2%. So trying to understand what is being negotiated in New Hampshire and then what it might do to translate into higher earned returns there.

Yes, in New Hampshire we had filed for $5.2 million increase and have been under temporary rates since the middle of the year for our New Hampshire gas operation. So we have been able to record some of the increase in revenues during a temporary rate period. We agreed to an initial temporary rate of $1.8 million.

Our negotiations currently are in very late stages where essentially in drafting stage we have reached a verbal agreement with the parties relative to final results and need to document that up and file it. And at that time we will be sure to make public and publish the settlement and the dollars involved in that.

Okay, thanks. Then on that same ROE slide, in Fitchburg where the earned returns were 12.8% but you footnote that that includes the net benefit of the gain net of the $2 million charge. If you were to back that out, what would be the underlying ROE, the actual ROE in Fitchburg?

We really had two events in Fitchburg that somewhat offset each other, as I indicated in the discussions of financial results. One was the credit of $4.7 million related to the purchase gas cost credit of $4.7 million and the second was a charge we took of approximately $2 million related to the Fitchburg rate case. So the net of those two is about $2.7 million pretax and on an after-tax basis would reflect roughly $0.15 per share.

I think that what -- and I haven't done the calculations, but calculating that out is probably fairly straightforward on the net income of act of that. You can calculate that out. I think what you will find is that we are earning about at our authorized rate of return or maybe a little more.

Okay. It would bring you down to that 9.2% or 9.5% level if you backed it out?

Yes.

Just I didn't know if -- we spoke earlier actually and there was a -- it looked like a misinterpretation by somebody from the Street on the gain you booked in the fourth quarter but I want to make sure we have it right. That the $4.7 million nonrecurring credit, that is on a pretax basis and so if we were to tax effect that it's about a $0.26 or $0.27 pickup.

So if we were to adjust that against the $0.92 reported fourth quarter, the actual operating number is more like $0.66, is that correct?

Yes, that is correct for the fourth quarter. Again, just to highlight, the $2 million charge was in the third quarter so netting that against it, the two together is about $0.15 on full-year earnings.

Right, but it appears the analyst focused on fourth quarter and backed out the entire $4.7 million, it appears on an after-tax basis. Suggested actually in the note that the underlying operating number was more like $0.48 and said that was flat with the prior year's fourth quarter and that that was disappointing and was cause for his downgrade of the stock today. So I didn't know if there was an attempt to get that straightened out.

Yes, we picked up on that as well. We have had communication with the analyst to get it straightened out.

Okay, great. Well, thanks very much.

You bet.

(Operator Instructions) We have no questions.

Ladies and gentlemen, this concludes the question-and-answer session for today. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.