Unitil Corp (UTL) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 Unitil earnings conference call. My name is Jeff and I will be your coordinator for today.

At this time all participants are in 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 would now like to turn the conference over to your host for today, Mr. David Chong, Director of Finance. You have the floor, Mr. Chong.

Good afternoon and thank you for joining us to discuss Unitil Corporation's second-quarter 2012 financial results. With me today are Robert 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 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, 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. The Company undertakes no obligation to update any forward-looking statement.

With that said I will now turn the call over to Bob.

Thanks, David. We appreciate you joining us today. I will begin my comments by discussing the highlights of our past quarter.

If you turn to slide four of our presentation, today we announced a net loss of $400,000, or $0.03 per share, for the quarter, which is an improvement of $400,000, or $0.05 per share, compared to prior year. The first half of this year we reported net income of $8.6 million, or $0.74 per share, compared to prior-year net income of $7.9 million, or $0.73 per share.

The improved results in the first six months of 2012 continue to reflect the phase-in of new rates, but were offset by the unusually mild weather in which there were 20% fewer heating degree days compared to prior year. We estimate that the mild weather negatively impacted our earnings by about $2 million, or $0.17 per share, in the first six months of 2012.

Turning to slide five, we continue to see the impact of the six base rate cases we undertook across all of our operating utilities over the last 18 months. During the second quarter we recently concluded our rate case for the New Hampshire division of Northern Utilities, which resulted in an annual base revenue increase of $3.7 million effective May 1, 2012. Collectively, these rate cases provided an increase of approximately 30% to total distribution revenue.

As Mark will summarize in a moment, we have begun to implement additional rate adjustments through improved capital cost trackers to recover additions to rate base and other spending that we have continued to make to serve our customers. We will also continue to evaluate the financial results for each of our operating utilities to determine the need for future base rate relief.

In May of this past quarter we issued 2.76 million shares of common stock in a registered public offering. The issue price was $25.25 per share, generating approximately $70 million of gross proceeds. We use the proceeds of this offering to contribute equity to all of our utility subsidiaries, repay short-term debt, and for general corporate purposes.

The equity offering helps us to strengthen our regulated utility capital structure upon which we earn a rate of return. In addition, the equity offering positions our balance sheet to fund organic growth initiatives, particularly the growth in our natural gas system.

On slide six, we continue to aggressively add customers in our gas service areas. Since December 2008 we have added 4,500 gas customers for an increase of 6.5%. In our region the employment rate in New Hampshire is 5.1%, Massachusetts is at 6.0%, and Maine is at 7.5% -- all well below the national average of 8.2%.

We have seen some improvement in economic activity positively influencing our weather-normalized unit sales for both electricity and natural gas. Weather-normalized gas sales were up 3.2% and 1.3% for the second quarter and the first six months of 2012, respectively. In our electric operations weather-normalized electric sales were up 3.2% and 2% for the second quarter and first six months of 2012, respectively.

We expect that new customer additions, particularly for the gas division, will continue to support the trend for continuing sales increases on a weather-normalized basis year over year.

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

Thanks, Bob. Good afternoon, everyone. Let me begin by discussing our financial results on slide seven.

Earnings increased by $400,000 for the quarter and by $700,000 for the first half of this year. Results for the second quarter and first half of this year were driven primarily by higher natural gas and electric sales margins, reflecting higher rates from recently completed rate cases, but partially offset by lower sales volumes and increases in operating expenses.

As Bob indicated, in the first six months of 2012 we experienced 20% fewer heating degree days compared to prior year which negatively impacted our sales volume. We estimate that the weather negatively impacted our earnings by about $2 million, or $0.17 per share, compared to prior year.

As a reminder, our financial results reflect the seasonal nature of our utility business. Annual gas revenues are substantially realized during the heating season as a result of higher sales of natural gas due to cold weather. Accordingly, the results of operations are historically most favorable in the first and fourth quarters.

Sales of electricity are generally less sensitive to weather than natural gas sales, but may also be affected by the weather conditions in both the winter and summer seasons. Fluctuations in seasonal weather conditions between years may have a significant effect on our financial results.

Looking at natural gas sales margins, they were up $2.8 million and $5.3 million in the quarter in the first half of this year. Sales margins were favorably affected by increased base rates and decoupling revenues from recently completed rate case and the growth in new gas customers.

Partially offsetting these increases were lower gas therm sales volume, which decreased 7.8% to 10.1% in the quarter and the first half of this year. The decrease in gas therm sales reflects the effect of milder weather in the six months of 2012 compared to 2011. Worth noting that approximately 13% of our natural gas therm sales are decoupled and changes in these sales due to the weather do not affect sales margins.

Turning to electric sales margins, they were up $1.6 million in both the quarter and in the six-month period ending June. The increased gas sales margin reflects higher base rate and decoupling revenues from recent completed electric rate cases, partially offset by lower electric sales volumes.

Total electric kilowatt hour sales decreased 2.7% and 3.8% in the quarter and the first half of this year. The decreases in kilowatt hour sales primarily reflect the effect of milder weather in the first six months of 2012 compared to 2011. Approximately 27% of electric kilowatt hour sales are decoupled and changes in these sales due to the weather do not affect sales margins.

Usource, our nonregulated energy brokering business, recorded revenues which were down by about $100,000 in both the quarter and the first half of the year, also reflecting the milder weather in 2012.

Turning to operation and maintenance expenses, operation and maintenance expenses increased $2.4 million and $3.6 million in the quarter and the first half of the year. The increase in O&M expenses in the first half of this year over the prior year reflects lower O&M expenses recorded in the first quarter of 2011 due to the receipt of a one-time $1 million insurance payment.

Other changes in O&M expense in the six-month period include higher utility operating costs of $1.2 million, higher employee compensation and benefit costs of $0.9 million, and higher professional fees of $0.5 million. Utility operating costs in the first half of this year include approximately $1.5 million of spending on vegetation management and electrical reliability enhancement programs. These costs are recovered through cost tracker rate mechanisms that result in corresponding increases in revenue.

Appreciation and amortization expense increased $1 million and $1.4 million in the quarter and the first half of the year, respectively, principally reflecting normal utility plan additions and amortization of regulatory assets. Local property and other taxes increased $0.5 million and $0.9 million in the quarter and in the first half of the year, reflecting higher local property taxes on higher levels of utility, plant, and service. Net interest expense decreased $0.2 million and increased $0.1 million in the quarter and the first half of the year, reflecting normal fluctuations in short-term borrowings and interest income.

Now turning to slide eight, as Bob mentioned, we completed a common equity offering in May. We used the net proceeds of approximately $66 million to contribute equity to all of our utility subsidiaries, repay short-term debt, and for general corporate purposes. The equity contributions provide for a strong balance sheet at the subsidiary level for our utility growth initiatives, in addition to creating a higher equity capitalization ratio upon which we earn a rate of return.

Common equity offering also significantly strengthened Unitil Corporation's consolidated capital structure. As of June 2012, Unitil's total debt to capitalization leverage ratio was approximately 53%, or about 11% lower than the prior year's leverage ratio. As a result of the capital raised in the second quarter, we also reduced our corporate credit facility borrowing limit from $115 million down to $60 million reducing the fees associated with this facility while continuing to provide sufficient borrowing availability for our working capital and capital expenditure needs for the foreseeable future.

We expect to continue to fund the majority of our capital needs with cash flow from operations. In the first six months of this year cash flow from operations was $52.9 million, up $6.3 million over prior year.

Finally, turning to slide nine, we have provided an update of our operating results at the utility operating company level. The chart shows the last authorized return on equity compared to the actual earned return on equity. The chart also reflects recent equity contributions to all of our utility subsidiaries with the proceeds from the common equity offering completed in May.

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, we have put in place longer term capital trackers to recover a significant portion of our future capital spending. During this past quarter we put a number of these trackers in place.

On May 1 we implemented a step increase of approximately $1.5 million in annual revenues for units of energy, our New Hampshire electric utility, and for the main gas division of Northern we implemented a step increase of $850,000 in annual revenue. On June 1 we implemented a step increase of about $500,000 in annual revenues for Fitchburg electric transmission system. Finally, later this year effective August 1 we expect to implement a cost tracker step increase of about $300,000 to begin the recovery of capital investment we are making in Granite State transmission, our interstate pipeline company.

We expect the combination of the rate relief we achieved this past year, future annual cost tracker rate adjustments, and organic sales growth will provide meaningful earnings support going forward. We also continue to evaluate the financial results for 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 from the audience. Thank you.

(Operator Instructions) Liam Burke, Janney Capital Markets.

Good afternoon, Bob. Typically the customer acquisition activity is the highest during the seasonally slower period of the second and third quarter. You mentioned in your prepared remarks about customer acquisitions from 2008, but how are they coming this year vis-a-vis the trends of new customers?

Through the end of June we have increased new services by 50% over last year. So to put that in perspective I think for all of last year we had between 700 to 800 new services, and I would fully expect by the end of this year that we could come very close to doubling that.

So again we see robust demand. We are also doing a marketing study, which we have not completed, to allow us to use our GIS system and other tools to in effect map out the system where the current pipes run and where we have the opportunities to pick up new customers. I would fully expect that study, based on preliminary results, to show us we have a significant opportunity over the next five years to increase our customer base.

Okay. I look at the maintenance CapEx annually at about $20 million to $25 million. With the additional investment in plant is that number expected to significantly change over the next several years?

No, it will stay -- it generally stays at about the same ratio if you will, Liam.

Okay. All right, thank you.

(Operator Instructions) Michael Gaugler, BMC.

Good afternoon, everyone. Looking through the Q, particularly in the long-term debt section, I think you guys have some pretty high debt in terms of interest rate sitting there. And I am just wondering in the next 12 to 24 months if you have any opportunities, perhaps, to refinance that to a lower rate.

In the next 12 to 24 we really don't have a lot of opportunity there, Mike. Most of our debt was issued in a period where the make-whole premium, call premium was a fairly standard term in the debt issuances and the provisions for make-whole are significantly penalizing and would not make it attractive for us to call any of that debt.

All right. That is all I had, gentlemen. Thanks.

(Operator Instructions) Since there are no further questions that concludes today's conference. Thank you for your participation. You may now disconnect.